Ideas & Debate

Kenya's hammer blow to loan apps long overdue

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The Central Bank of Kenya building in Nairobi. PHOTO | DENNIS ONSONGO | NMG

Summary

  • Following a lot of ethical uproar by the Kenyan digital credit borrowers, the Kenyan government has finally put in place a sledgehammer to regulate the lawless Fintech in December 2021.
  • The Kenya Fintech law that takes effect in March 2022 suggests that finally, many moons later, the Kenyan government has come to the realisation of the bad and harmful practices such as high-interest rates and harassment of borrowers exerted by the digital lenders.
  • The Central Bank of Kenya (Amendment) Act, 2021 will deal with an infringement or illegality of digital lenders under this sledgehammer of an amendment.

Following a lot of ethical uproar by the Kenyan digital credit borrowers, the Kenyan government has finally put in place a sledgehammer to regulate the lawless Fintech in December 2021.

The Kenya Fintech law that takes effect in March 2022 suggests that finally, many moons later, the Kenyan government has come to the realisation of the bad and harmful practices such as high-interest rates and harassment of borrowers exerted by the digital lenders.

The Central Bank of Kenya (Amendment) Act, 2021 will deal with an infringement or illegality of digital lenders under this sledgehammer of an amendment.

Most Kenyans have felt the whirlwind and impact of the unregulated Fintech. As outlined in my journal article published on African Interdisciplinary Studies Association (AISA) in August 2019 the sophisticated digital credit apps have done more harm than good.

Although the ease of access to credit is contributing to rampant digital credit uptake, it is affecting the financial health of low-income households through the accumulation of debt and the loss of future borrowing opportunities.

A significantly high number of borrowers unable to repay their loans end up highly penalised, blacklisted by credit reference bureaus (CRB), and locked out of future credit options.

At times, some borrowers have resorted to selling off their assets or skipping a meal among other drastic measures just to avoid being locked out of the credit system.

A 25-year-old man killed himself two years ago after he was blacklisted and blocked from receiving loans in the future owing to delayed payment of Sh3,000.

Although rather late, the legislative adjustment is a commendable gesture. It is time for sledgehammer methods to regulate the ubiquitous influence these digital credit apps embody under the guise of financial inclusion and indiscriminate borrowing.

Inasmuch as these companies give access to quick unsecured short loans, a lack of regulation had increased the risks of borrowers relying on them.

Areas of concern that need to be mitigated are high-interest rates on short-term loans; privacy invasion through data mining; lack of understanding on why their details are needed and how that determines eligibility for the loans; bias against customers with shallow digital footprints; the fraudulent use of SIM cards to register multiple accounts; and lack of technical know-how to operate the complicated user interface.

A highly unregulated Fintech space advances itself into what some scholars have called modern-day exploitation. The ‘double-edged sword’ cultivates a borrowing pandemic and lifelong indebtedness yet at the same time opens digital credit access.

The over-glorification of financial inclusion pegged on the proliferation of mobile lending apps in Kenya has continued to reinforce the existing power relationships within our society. Not surprising, ordinary people are the most affected. It is clear the modern bourgeois society has established new conditions for oppression and new forms of struggle to replace the old ones.

Modern-day exploitation is herein implied through the low-income populous buying into the digital credit apps deliberately to survive; unconsciously they adhere to the stipulated rules and take loans mangled with high-interest rates, which they are unable to repay on time in the absence of regular cash flow.

Through this, they end up heavily penalised and enriching the companies. Consequently, the adoption of digital credit apps targeting the low-income earners unavoidably depicts the intrinsic interplay of power and authority between these three functions: What is in it for app companies? What do borrowers stand to gain or lose? What is the role of the government?

There is little understanding of why the government has taken over 10 years to legislate and regulate digital lenders in Kenya. It is defeating to begin asking these questions when digital credit has become deeply entrenched.

Exactly how Fintech startups were licensed to run operations without proper implementation of a regulatory framework guarding the consumer on digital credit remains a grey area.

Exactly why the Kenyan government and its agencies would be willing to watch without action when the bottom of the pyramid is sinking into debt has eluded theorists and commentators.

It is indisputably challenging, given the capital investment injected into the Fintech space by the digital lenders and the theories prowling financial inclusion, that there is not yet an evaluation of the socio-economic impact of digital credit.

Ironically, an assessment of the market study conducted by FSD Kenya back in 2018 and another by IFC in 2017 found that it was hard to ascertain the social and economic impact digital credit has yielded over the past five years. Yet the overglorification lingers on.

Without a proper regulatory framework, borrowers’ education, and transparency, the interrelations among Fintech startups, borrowers, and the government will continue to feel constantly trapped in a financial maze.

But for the borrowers mostly as they lack the financial and technical knowledge to leverage these apps to their advantage.

This kind of financial paralysis resonates with David Graeber’s argument that debt can also be a way of punishing winners who are not supposed to win.

The position borrowers have been placed in is an attempt to escape from poverty; however, they remain chained until they can repay their debts to avoid the high penalties or being blacklisted by CRB.

I wish that these laws were put in place before operationalising the Fintech space in Kenya.

More importantly, the process, policies, structures, and regulations need to be regularly streamlined especially if there is a proven case study of the success rate of financial inclusion.

Njathi is a PhD candidate in communication and digital media at North Carolina State University