Kenya’s rapidly growing digital loans market has attracted a wide range of formal and unregulated operators who pose serious money laundering and terrorism financing risks to the economy, sector regulators have said.
The Central Bank of Kenya (CBK) says in a recently published financial sector stability report that the majority of outfits offering digital loans do so on relaxed conditions and know so little about their customers.
“There are concerns that increased usage of digital credit predisposes the economy to risks such as money laundering, terrorist financing, and technology risks,” says the report that also captures the findings of Financial Sector Deepening (FSD) Kenya, a not-for-profit agency that tracks developments in the financial services sector.
The report, which is a product of CBK, the Capital Markets Authority, the Insurance Regulatory Authority, the Retirement Benefits Authority and the Sacco Societies Regulatory Authority comes amidst reports that commercial banks alone disbursed Sh12.78 billion through digital channels.
The regulators say that whereas digital credit channels have expanded financial inclusion by reducing borrowing constraints, financial stability risks have increased because access to credit is expanding without proper supervision.
The report reckons that some lenders have shifted from the know-your-customer (KYC) regime to allowing the opening of basic, “no frills” bank accounts with minimal KYC requirements.
This has weakened the Anti-Money Laundering (AML)/Counter-Terrorist Financing (CFT) framework.
“In the context of digital credit, these risks may further be amplified, as digital lenders generally do not require in-person KYC assessment prior to extending digital loans,” the report says.
The regulators say that the risk is borne by the fact that most digital lenders appear to focus on advancing loans as fast as possible instead of protecting the system against possible risks.
“This is particularly true for credit-only digital lenders that are operating outside of the regulatory perimeter and are thus not subject to the same regulatory oversight as commercial bank digital loan products,” say the regulators.
The five financial sector regulators warned in June that Kenya’s financial services market is becoming replete with an increasing number of “unlicensed and unregulated” financial services and products that pose huge risks to the sector and the economy.
FSD found in a March 2017 survey that Kenya has more than 20 digital credit providers and that the digital credit ecosystem includes a range of non-bank, credit-only lenders that operate outside of the regulatory perimeter of the CBK.