Market News

CBK to regulate mobile loan rates in law change

The Central Bank of Kenya (CBK) will regulate monthly interest rates charged by the digital mobile lenders and borrowers’ non-performing loans if a proposed law before Parliament is adopted.

The banking regulator will, among others, have to approve increases in digital lenders rates and other loan charges as well put a ceiling on non-performing loans at not more than twice the defaulted credit.

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

“The principal objective of this Bill is to amend the Central Bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” says a notice on the Bill.

“The Central Bank of Kenya will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”

The digital lenders will play under the same rules as commercial banks, including having to seek the CBK’s nod for new products and pricings if the Bill becomes law.

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 Bill also comes 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 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.

The push to control the activities of digital lenders comes eight months after Kenya removed the legal cap on commercial lending rates.

The cap, which was introduced in September 2016, slowed down 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 too risky to lend to.

The subsequent credit crunch triggered an appetite for digital loans, attracting unregulated microlenders to Kenya’s credit market in response to the growth in demand for quick loans.

Market leader M-Shwari, Kenya’s first mobile-based savings and loans product introduced by Safaricom #ticker:SCOM and Commercial Bank of Africa #ticker:NCBA 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.

In April, the CBK barred unregulated digital mobile lenders from forwarding the names of loan defaulters to CRBs.