Digital lending companies operating in Kenya are set for a shake-up.
The country’s central bank is proposing new laws to regulate the monthly interest rates charged on loans by digital lenders in a bid to root out what it sees as predatory practices. If approved, digital lenders will need central bank approval to increase lending rates or launch new products.
The move comes amid growing concerns about the scale of predatory lending given the proliferation of startups offering unsecured online loans in Kenya. Unlike traditional banks, which require a paperwork-intensive process and collateral, digital lending apps grant loans quickly, often within minutes, and determine creditworthiness by browsing smartphone data, including text messages, phone logs, etc. calls, bank balance messages and bill payment receipts. This is an offer that predictably gained ground among the middle classes and low-income people who generally found access to credit through traditional banks beyond reach.
But the unchecked growth of digital lending has come with many challenges. It is increasingly evident that access to fast digital loans leads to an increase in user personal debt in Kenya. Shameful tactics used by digital lenders to recover loans from defaulters, including sending messages numbers on the borrower’s telephone contact list, from family to work colleagues, have also gained notoriety.
Perhaps more importantly, the digital lending has also become notorious for its usurious interest rates—up to 43% per month, questions about the clarity of their terms and the repayment schedule. By mid-2018, M-Shwari, Safaricom’s loan department, had distributed $ 2.1 billion in loans to Kenyan users as of 2018 and dominates the market largely through distribution through the ubiquitous M-Pesa mobile money service.
Amid growing concern about the financial health of users, Google announced last August that loan applications requiring loan repayment in two months or less will be be excluded from their application store-the main distribution point for most applications. It’s a stipulation that has forced digital lenders to change their business models.
A report released in January by equity research firm Hindenburg Research suggested that Android-based lending apps in Nigeria, Kenya and India owned by Opera, the Chinese internet player, generally demanded repayment of loans in a 30-day period. The report also suggested discrepancies in the information contained in the description of online applications and their actual practices.
The Central Bank of Kenya bill is not the Kenyan authorities’ first attempt to regulate digital lenders. Last November, the government passed new data protection laws to raise the standards for organizations to collect, store and share consumer data. And, in April, the central bank banned digital lenders blacklist borrowers who owe less than 1,000 shillings ($ 9) and forward the names of defaults to credit reference bureaus.
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