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Digital lenders oppose rate cap plan

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Central Bank of Kenya Governor Patrick Njoroge. FILE PHOTO | NMG

Summary

  • Digital lenders have warned against proposed introduction of controls on charges and fees on loans, claiming it will hurt further the flow of credit to micro-sized businesses.
  • The Central Bank of Kenya (Amendment) Bill, 2020, seeks to empower the banking regulator to supervise digital lenders for the first time.
  • Most banks froze unsecured loans to small- and micro-sized enterprises after introduction of controls on loan charges from September 2016 to November 2019 citing “high” risk of default, forcing a reversal of the law.
  • The proliferation of tens of app-based mobile lenders largely during the interest cap period has saddled borrowers with high loan charges, which sometimes top 100 percent when annualised.

Digital lenders have warned against proposed introduction of controls on charges and fees on loans, claiming it will hurt further the flow of credit to micro-sized businesses.

Ivan Mbowa, the regional general manager for Tala and a director at Digital Lenders Association (DLAK), said the industry will resist planned legal attempts to cap charges and instead favour risk-based loan pricing models which are powered by machine learning technologies.

The Central Bank of Kenya (Amendment) Bill, 2020, seeks to empower the banking regulator to supervise digital lenders for the first time, in a bid to curb the steep digital lending rates that have plunged many borrowers into a debt trap as well as predatory lending.

“It’s unfair to charge every customer the same rate because different customers present different risk because of…different intended use of the funds. Somebody borrowing for consumption should have a different rate from one borrowing to put in business,” Mr Mbowa said.

“We saw with bank loan rate caps, for example. That did not have the intended effect that maybe the authors of the law expected.”

Most banks froze unsecured loans to small- and micro-sized enterprises after introduction of controls on loan charges from September 2016 to November 2019 citing “high” risk of default, forcing a reversal of the law.

The proliferation of tens of app-based mobile lenders largely during the interest cap period has saddled borrowers with high loan charges, which sometimes top 100 percent when annualised.

This has led to mounting defaults and an ever ballooning number of defaulters who have been adversely listed with credit reference bureaus (CRBs).

“We believe that our pricing is… an actual representation of the risk involved in providing unsecured or no-collateral loans,” Mr Mbowa said.

“Whenever people start to say that 15 percent is like X percent per annum, they are making unfair comparison because we are not like banks who are providing this for at least 12 months. It may seem relatively high, but it’s not an interest rate.”

Mobile micro-lenders such as Tala and Branch were in April locked out of the CRB framework at a time the bulk of accounts negatively listed were linked to digital borrowers.

Central Bank of Kenya Governor Patrick Njoroge said on May 28 that while the about 100 app-operated digital lenders accounted for 0.14 percent of the credit market —a fraction of a small bank’s share — they made up 90 percent of “noise” on defaulters and “caused pain” to borrowers by contacting families, friends and employers.

“We have not relied on the CRB database to make determinations on who to lend to, but that data is very useful … as a deterrent for those who may want to default,” Mr Mbowa said.