The lenders, charging borrowers annualised interest of between 18pc and 200pc, have tapped into a market that has become more lucrative.
Their entry was in response to a rise in demand for quick loans and the freeze in commercial bank lending to individuals
Besides the high interest rates, the micro-lending space is plagued by lack of transparency.
Parliament has asked the Central Bank of Kenya to publish regulations that will see interest rates charged by more than 500 unregulated digital microlenders controlled by the banking watchdog.
National Assembly’s Information, Communications and Technology (ICT) committee also wants the banking regulator to ensure the digital lenders are guided by the interest caps introduced in 2016.
The current status of the sector allows the microlenders to skirt a government cap on interest of four points above the central bank’s benchmark interest rate, which now stands at nine percent—capping loan rates at 14 percent.
“The interest rates should be those applicable to commercial banks for standardisation,” the committee said in a report tabled in Parliament.
The proliferation of the lenders using the mobile money technology to extend credit to the banked and unbanked alike, has saddled borrowers with high interest rates.
Their entry was in response to a rise in demand for quick loans and the freeze in commercial bank lending to individuals and small business that followed the 2016 capping of interest rates.
The lenders, who are charging borrowers annualised interest of between 18 per cent and 200 percent, have tapped into a market that has become more lucrative than mainstream banking where lending rates are capped by law at 13 per cent.
Seasoned players The list of seasoned players in this market includes Letshengo, Tala, Izwe and Branch, while new market entrants include digital lending platforms such as Nairobi Securities Exchange-listed firm Car & General.
The microlenders mostly offer borrowers short-term loans, lasting days to one month, according to a survey by research firm Financial Sector Deepening (FSD).
Others borrow to bet, pay school fees and settle other loans.
Borrowers, most of whom are unable to access loans from mainstream banks, are attracted to the microlenders who demand relatively less documentation and are quick to disburse the cash.
The FSD study however found that besides the high interest rates, the micro-lending space is plagued by lack of transparency.
Borrowers, for instance, reported that they were charged fees they did not expect while others did not fully understand the costs or fees associated with loan.
The high interest rates are partly seen as a means of mitigating the impact of defaults since the firms lend to some of the riskiest individuals and businesses.
The top reasons cited for default include poor business performance, job loss, lack of planning and lack of surplus income to repay the loans.
China last year stopped microlenders in that market from issuing loans to borrowers with no source of income, with the firms also banned from misleading consumers into over-borrowing.
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