Lawyers want Parliament to cap cost of mobile loans

From left, Tala director Mario Sangalone, InVenture vice president EA Amanda Donahue, Tala CEO Shivani Siroya and marketing officer Ami Gosalia at a past event. FILE PHOTO | NMG 

Parliament has been asked to put all credit providers, including mobile phone-based loans such as M-Shwari, under the in-duplum rule – a move that could sharply reduce interest rates payable by borrowers.

The Law Society of Kenya (LSK) says in a petition before Parliament that exclusion of some lenders from the law has opened a window for continued exploitation of borrowers.

The society wants the change to come through amendment of the Consumer Protection Act to make the in-duplum applicable to all credit providers and credit agreements notwithstanding the nature of parties to the agreements.

“These provisions shall, for avoidance of doubt, apply equally to mortgage service providers and mobile lending,” Allen Gichuhi, the LSK president, says in a petition to Parliament.

The in-duplum rule provides that interest accruing on a debt stops where the interest accruing has equalled the outstanding principal debt. It came into force following an amendment to the Banking Act in 2006.


LSK reckons that the Consumer Protection Act does not adequately and comprehensively protect consumers with respect to interest charged despite consumer protection being enshrined in Article 46 of the Constitution.

The lobby is challenging what it sees as an inherent unfairness in protecting borrowers from banking institutions but not from other providers of credit, including mobile money lenders and microfinance institutions.

This is the second attempt to put a cap on the cost of mobile loans, after Commercial Bank of Africa successfully argued that its 7.5 per cent charge on M-Shwari loans did not qualify to be included in the interest rate cap as it was merely a one-off transaction cost.

Other online lenders such as Tala and Branch charge customers much higher interest than M-Shwari charges.

KCB #ticker:KCB and Equity Bank #ticker:EQTY mobile loans are capped under the Banking Act.

Mr Gichuhi argues in his petition that Parliament needs to remove the inherent limitations of Section 44A of the Banking Act in respect to automatic application, debt recovery litigation and the method of application.

The petition has since been committed to the departmental committee on Finance for scrutiny.

Mr Gichuhi says ordinary citizens are suffering in the hands of unscrupulous lenders and shylocks, who are charging high interest rates at five per cent a month.

LSK argues that several Acts of Parliament, including the Microfinance Act, 2006 and the Housing Act Cap 117 do not adequately protect borrowers from mobile money lenders, which is the fastest growing segment of the credit market.

LSK said the Money Lenders Act was repealed in 1984 and has not been replaced to regulate individuals, who provide credit services.

“In all credit agreements, interest shall automatically stop to run when it equals the unpaid principal, and where the accrued interest or a part thereof is paid, it shall start to run again but only until it is again as high as the unpaid principal,” Mr Gichuhi said in the proposed changes to the Consumer Protection Act.

The petition says the maximum amount referred to in law will be “the sum of the principal owing when the loan becomes non-performing, interest in accordance with the contract between the debtor and the institution and in accordance with the prevailing law and expenses lawfully incurred in recovery of any amounts owed by the debtor provided that despite any other law or statute or a credit agreement to the contrary, the amounts…that accrue during the time that the consumer is in default may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time the default occurs.”