The competition watchdog has opened investigations into the exorbitant monthly interest rates charged by digital mobile lenders who also push third parties to recover amounts owed from defaulters.
The Competition Authority of Kenya (CAK) announced on Friday it was investigating both regulated and unregulated digital lenders whose steep lending rates have plunged many borrowers into a debt trap.
Tens of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans.
Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and an ever ballooning number of defaulters who have been adversely listed with credit reference bureaus (CRBs).
The CAK investigations come amid complaints that digital lenders do not provide full information to borrowers on pricing, punishment for defaults and recovery of unpaid loans.
Digital lenders have also been accused of abusing personal information collected from defaulters’ mobile phone contacts list to bombard relatives and friends with messages regarding the default and asking third parties to enforce repayment.
CAK Director-General Wang’ombe Kariuki said the investigations will seek to uncover consumer protection breaches. "Increase transparency and comprehensiveness of product information and terms and conditions," Mr Kariuki said through the latest Kenya Gazette notice on the brief of the inquiry.
"Increase consumer control over personal information to expand choice and competition…Identify potential consumer protection risks," he added.
Most of the mobile loan takers are oblivious to the conditions that include lifetime of SMS notifications, full surrenders of their personal data to third parties and waiver of their right to dignity.
In recent months, for instance, consumers of mobile app Okash who delayed or defaulted on their loan repayments have had the unpleasant experience of having the service provider reach out people in their contacts list in a bid to recover the funds.
"Hello, kindly inform XX to pay the Okash loan of Sh2,560 TODAY before we proceed and take legal action to retrieve the debt," says a sample text message the service provider sends to people in one’s contact list.
"We have tried calling in vain. This is the last reminder. Many thanks, Okash team."
The law empowers the competition watchdog to reverse borrowing terms based on misleading representations on loans issued to their customers.
The Act empowers the regulator to impose a financial penalty of up to 10 percent of the value of sales of the goods or services under investigation.
Last year, CAK fined Harambee Sacco, one of the biggest co-operative societies in Kenya by client deposits, and Faulu Microfinance Bank for making partial disclosure on loans
In the two cases, the complainants were restituted through reversal of the effects of the infringements effected by Faulu and Harambee Sacco. Further, the parties committed to cease engaging in any conduct that contravenes the Competition Act.
The Central Bank of Kenya (CBK) and the Treasury are also preparing a proposed law that will for the first time cover digital mobile lenders in fresh efforts to curb their exorbitant monthly interest rates and predatory lending.
The push to control the activities of digital lenders comes two months after Kenya removed the cap on commercial lending rates.
The cap, which was introduced in September 2016, reduced private sector credit growth as commercial banks turned their backs on millions of low-income customers as well as small and medium-sized businesses deemed as too risky to lend to.
The following credit crunch triggered an appetite for digital loans, leading tens of unregulated microlenders to invade Kenya’s credit market in response to the growth in demand for quick loans.
The law on the cap was removed last November.
Market leader M-Shwari, Kenya’s first savings and loans product introduced by Safaricom and Commercial Bank of Africa in 2012, charges a "facilitation fee" of 7.5 percent on credit regardless of its duration, pushing its annualised loan rate to 395 percent. Tala and Branch, other top players in the mobile digital lending market, offer annualised interest rates of 152.4 percent and 132 percent respectively.
CBK Deputy Governor Sheila M’Mbijjewe said a recent suicide incident reported to the regulator had highlighted the threat posed by the digital lenders and increased the need for their regulation.
"In November last year we had a lady come to the Central Bank to explain to us how her husband had committed suicide following his getting involved with one of these lenders," she said yesterday.
She added the alleged predatory lending was linked to the death of the borrower following default.
"What this lender chose to do when her husband was unable to pay the debt was that they extracted the contacts list on his phone and started sending messages to all his contacts, including his mother, grandmother and aunt," she said.