Digital lenders should self-regulate before Big Brother moves in

Thanks to the strategic alignment to the global technological revolution, Kenya has one of the most effective digital lending access rates especially to micro, small and medium enterprises as well as households at the bottom of economic pyramid. This digital lending movement has forced commercial banks to join the frenzy with commercial banks like KCB, Equity Bank and Cooperative, among others, joining Safaricom which has M-Shwari.

According to Financial Deepening Sector (FSD, Kenya), the market has grown fast: M-Shwari has disbursed Ksh230 billion loans since inception in 2012, while KCB, the largest lender by asset size in Kenya, now provides 90%  of its loans through its KCB M-Pesa platform.

Equity Bank, the leading institution in terms of depositors had disbursed Ksh57 billion via the Equitel platform by March last year. Overall, the country now has at least 49 digital lending apps lending between Ksh50 and Ksh50,000.

But there is a lacuna in the sense that despite unprecedented growth in platforms, digital credit is not reaching everyone. It remains ill-suited for most of the population whose livelihoods are characterized by irregular cash-flows, such as farmers and casual workers. Reaching these segments will require a deeper understanding of their financial lives, the key risks that they face, and the day-to-day liquidity needs.

As digital lending grows, unethical players will try to steal the show to accumulate profits. Pyramid schemes posing as genuine mobile app lenders are on the rise, with some asking unsuspecting borrowers to pay registration fees and deposits before vanishing into thin air. They have neither registered physical address nor customer care help lines. They are heavily advertised on social media promising quick loans, unbelievable returns and packages.

In July last year, financial services regulators – Central Bank of Kenya, Capital Market Authority, Insurance Regulatory Authority, Retirement Benefits Authority and Sacco Societies Regulatory Authority (SASRA) – expressed concern over the increasing number of unlicensed and unregulated financial products. Some of these products include online pyramid schemes, credit and saving schemes as well as mobile loan apps.

Unlike those operated by commercial banks, microfinance institutions and cooperative and credit societies, the digital informal lenders operate under their own rules. There is also a growing concern about lack of a credit pricing model in the sector, exposing consumers to exploitation. While some digital apps are lending at reasonable interest rates, others entice clients with flashy offers laced with hidden charges that push interest rates to the extreme.

In August last year, the Central Bank cautioned that despite Kenya boasting advancement in developing financial technology solutions, lack of adequate guidelines has opened room for rogue players. In May the same year, and for the first time, the National Treasury published a draft Bill on financial regulation which covers digital lenders. A key objective is to ensure that providers treat retail customers fairly.

But above this, there is also need for digital lending apps to go beyond business and show a sense of responsibility. Various studies show that access to credit alone is not enough. First-time customers need support from providers to understand the terms of these loans, as well as their benefits and consequences.

No wonder the World Bank has described mobile money as a success field but equally a regulatory minefield. It warns that digital credit, if not properly regulated, can easily exacerbate poverty levels and lead borrowers into debt traps.

[ Also Read: Digital credit moves from experiment to economic mainstay ] 

It is, therefore, upon the sector to come up with ways to analyze borrowing habits not only for profit maximizing purpose but also to avert indebtedness. The FSD report in fact echoes the need for responsible practices in digital lending space, calling on players or an oversight to develop better tools to track over-indebtedness and multiple borrowing.

It is imperative for the sector to develop effective self-regulatory policies to protect clients and safeguard its credibility. Self-regulation will help avert government forced interventions and effects of the Banking Act, 2016 that did not only affect operations in the banking sector but crippled lending to the private sector. This negatively affected economic growth in the country.

Transparent and responsible digital lending practices will see Kenya lead the world in spearheading the Universal Financial Access 2020 initiative and leverage on it to realize Sustainable Development Goals.

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