Google seeks to set rules in digital lending ‘Wild West’

Did you know that if you wanted to own a bank, you do not have to have Sh1 billion capital, apply for licences and pay taxes? All you do is just download an android package for free, customise it and voila you are a lender.

The Android Package- APK is a file format used by the Android operating system for distribution and installation of mobile apps most of which are free.

The ease of downloading, customising and operating the platform has seen known digital lenders increase to 62 in Kenya, where there are only 42 mainstream banks.

However Google now wants to limit the number of platforms that enjoy this low barrier of entry into the banking realm, to ensure at least they are regulated in some form.

To continue accessing the Google App store platform, the multinational has asked apps for personal loans to disclose maximum Annual Percentage Rate (APR), which generally includes interest rate plus fees and other costs for a year, or similar other rate calculated consistently as provided for by local regulatory framework.

It has also banned those issuing loans that mature in less than two months.

“We do not allow apps that promote personal loans which require repayment in full in 60 days or less from the date the loan is issued (we refer to these as "short-term personal loans"). This policy applies to apps which offer loans directly, lead generators, and those who connect consumers with third-party lenders,” the updated terms and policies read.

Eric Muriuki General Manager New Business Ventures at Commercial Bank of Africa (CBA) said the announcement is curious, wondering what motivated the tech giant to get involved in direct market intervention.

“You have to reflect on this in the context of digital ecosystem where Google has now emerged to play a very interesting role where they are technically applying market action that is of a regulatory nature, which puts financial services regulators also in an interesting position,” he said.

“But of course without understanding what their motivation is we cannot tag them as a regulator.”

Mobile lending platform has grown out of the lure of convenience and technological disruption. Data is now easily available, reducing asymmetry of information. This means it is not only a shopkeeper who is able to create a profile on whether you are a good borrower or not but any other lender, formal or informal, that has access to data.

Short-term loans have become very important for cash flow smoothing and protecting consumers going rough financial patch. Their popularity has attracted formal players especially banks, who see this as an opportunity to increase lending outside the ambit of the rate capping law.

But in this nascent space, there are no rules. It is more like the Wild West of loan market where interest charged vary by product owner and design.

In Kenya there are two types of mobile lenders — those operated by banks and those operating on the fringes.

Even those operating at the margins can be categorised between those that are mainstream and have made attempts at formalising their operation under the umbrella body of Digital Lenders Association of Kenya (Dlak), and those that are entirely under the radar.

Dlak is a group of about 11 mobile-based lenders including Tala, Alternative Circle, Stawika Capital, Zenka Finance, MyCredit, Okolea, Lpesa, Kopacent, Four Kings Investment, Kuwazo Capital and Finance Plan.

This group first suggested the creation of self-regulations to conduct ethical lending. However, this was rebuffed by the Central Bank of Kenya Governor Patrick Njoroge.

“We did have a very good conversations but I raised concerns about them working without a licence,” Dr Njoroge said on Tuesday at the bi-monthly post Monetary Policy press briefing.

“We had concerns about how they dealt with customers and concerns about their sources of money. If you are a shareholder in a bank we check the source of your money, you just do not show up with cash.”

The Governor said he had warned that these players could be “a huge source concern” over money laundering and could not be trusted to operate in a financial space without any form of regulation.

Experts say there is a bigger danger in the digital lending space given that the applications have capacity to weave through your phone and steal your data.

Mr Muriuki says the level of non-performing loans (NPLs) for some of them is so high that their models do not make business sense unless they are simply in it to collect and sell data.

“When you look at the pricing and NPLs for some of these digital lenders a lot of them are actually running in losses. So you would ask yourself, is their commercial model strictly about lending or is it about data harvesting or selling?” he said.

Mr Muriuki noted that CBA has a NPL of 1.9 percent and is doing its own intervention to encourage responsible lending which is limiting credit levels to amounts saved rather than just allowing someone to borrow.

“We have seen bank and non-bank lenders competing with us consistently in the double-digit range of NPL which means that they can only price higher or continue looking for more vulnerable customers which is a short-term strategy,” he said.

Barclays Bank of Kenya Chief Executive Jeremy Awori said their new platform Timiza does not lend to students because they do not really have an income.

Muriuki says if laws are to be made to regulate the sector, it should treat mobile loans different from conventional loans. He adds that the fact that analysts are trying to use models for long-term loans on mobile micro loans like the annual percentage rate is an indication that the wrong tools are being applied to deal with this new segment.

“These are two different markets requiring separate rules and regulations, is something the regulator should look at,” he says.