CBK regulation of digital lenders is long overdue

Short-term mobile loans have become essential for many individuals and small traders. PHOTO | FOTOSEARCH

The public debate on whether to regulate digital lenders has dragged on for months. The tabling of the Central Bank of Kenya (Amendment) Bill, 2021 in Parliament should settle it.

Riding on the desperation of Kenyans in need of quick cash, the digital lenders have been thriving in an unregulated regime, charging borrowers steep interest rates, slapping them high fines in case of default, and dragging them into debt traps.

In a tough economy, where many people have moved away from banks to borrow from digital lenders and the cash is given out in minutes, the firms lend about Sh2 billion a month now, a drop from the Sh4 billion before the coronavirus pandemic hit.

While there is no doubt this is a profitable sector with over 11 companies, there are still fears it could be exploited for financial crimes.

Under the proposed law, the firms will be required to disclose their source of funds to curb money laundering and terrorism financing.

Having the digital lenders play under the same rules as commercial banks, including seeking the regulator’s nod for new products and pricing, will address concerns of overpricing of loans and shaming of borrowers who default on payment.

Illegal mining of customers’ private data is rife in the digital lending sector.

Currently, if a consumer wishes to access a digital loan, they must accept the terms and conditions of the use of the application. Some of these terms are unfamiliar to many and the users end up giving access to text messages and contacts.

On the flip side, the regulations will benefit digital lenders. They have been issuing credit with no formal cushion should borrowers go rogue and refuse to pay.

In a regulated market, the digital mobile lenders can forward the names of loan defaulters to credit reference bureaus instead of relying on uncouth methods such as bombarding relatives and friends with messages regarding loan default and asking third parties to enforce repayment.

The growth of the financial technology industry requires uniform regulation. The strict rules will edge out rogue players, protect customers, and ensure compliance with financial laws.

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