Digital Lending: A Sound Regulatory Framework Is in Everyone’s Interest
By Rose Muturi
Financial Inclusion
There is a significant amount of people in Kenya living without a documented financial history. Without that documentation, it has been nearly impossible for banks and other traditional financial institutions to understand and provide credit to these people.
The advent of digital technologies like mobile money and the growing availability of alternative sources of data has enabled us to overcome the limitations of traditional finance to push the limits on financial inclusion.
Today, customers can choose to share their phone data with providers to apply for loans. Providers can then underwrite these borrowers, even if they’ve never borrowed formally before and have no formal financial records. These apps are providing much-needed liquidity to millions of previously underbanked, yet credit-worthy Kenyans.
A recent survey by the Consultative Group to Assist the Poor (CGAP) and FSD-Kenya found that more than a third of borrowers (37 percent) take digital loans for business purposes and that almost three quarters (75 percent) of borrowers have completed secondary education. The survey also found that only one in eight borrowers had defaulted on a loan.
To better understand the difference Tala makes in customer’s lives, we conducted a study on Tala’s impact in Kenya. The study found that Tala’s loans have been key in helping people smooth their income and expenses to create more financial stability. For example, 70 percent of entrepreneurs described using Tala to help keep their businesses running through periods of uncertain income. The study also revealed that many Tala customers used these loans to grow their income, with 15 percent of respondents describing business expansion as their primary reason for using Tala.
These survey findings help validate what we see every day: which is that borrowers use these loans to grow financially by investing in their businesses and that they are successfully paying back their loans. It speaks to the potential of the rapidly growing digital lending industry to promote inclusive growth. Digital lenders recognize this potential, and some even have financial inclusion and social impact at the core of their business model.
Consumer Protection
However, as many digital lenders are using new technologies to provide groundbreaking financial access to their customers, we must assume the responsibility to provide these services fairly and ethically.
It is critical that digital lenders practice the highest standards of consumer data protection, customer service, and transparency while being able to innovate and expand access to more people through this evolving technology.
Encouragingly, many have already started to do so, while others have gone even further, providing education and creating more awareness about over-indebtedness among customers. Some also actively and voluntarily participate in data sharing with credit bureaus.
Responsible lenders recognize that consumer protection and data sharing are increasingly important, and are working together to promote high standards across the industry.
Regulatory
Despite the efforts of responsible lenders, challenges do remain. With the digital lending industry being one of the fastest growing segments within the financial sector in Kenya, new mobile services are launched regularly including products by traditional banks as well as rogue lenders. This can make it increasingly difficult for consumers to differentiate between ethical lenders that uphold best practices and unprincipled lenders.
Collaboration across industry stakeholders will be key in creating and enforcing high standards for digital lenders. A conversation already exists between customers and digital lenders, providing valuable feedback on how we can continue to improve our services. Regulators are the final piece of the puzzle, and for regulators to make informed choices for Kenyan consumers, they will benefit from gaining a deep understanding of digital lenders and how they operate.
To achieve this essential degree of collaboration, we encourage sustained dialogue between responsible digital lenders and stakeholders across sectors, including the Central Bank of Kenya, the Treasury, and the Communications Authority. We propose conducting that dialogue through a regularly scheduled working group, where we can engage issues like protecting consumers, establishing fair lending standards and encouraging healthy growth in our industry together.
Conclusion
Let’s work together to build a strong financial system that makes life easier for Kenyans.
Together, we can promote and enforce ethical lending practices. We can empower borrowers to make informed decisions by calling for clear disclosure and transparency in loan pricing and terms. We can combat over-indebtedness by requiring digital lenders to make informed lending decisions based on the debt capacity of the borrower. We can protect customer privacy by encouraging lenders to treat all customers with the utmost respect and dignity throughout the entire borrowing experience.
We know there are healthy ways to protect consumers without stifling industry growth, and we are excited to work with regulators to strike that balance.
About Soko Directory Team
Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory
- January 2024 (238)
- February 2024 (227)
- March 2024 (190)
- April 2024 (133)
- May 2024 (157)
- June 2024 (145)
- July 2024 (136)
- August 2024 (154)
- September 2024 (212)
- October 2024 (255)
- November 2024 (97)
- January 2023 (182)
- February 2023 (203)
- March 2023 (322)
- April 2023 (298)
- May 2023 (268)
- June 2023 (214)
- July 2023 (212)
- August 2023 (257)
- September 2023 (237)
- October 2023 (264)
- November 2023 (286)
- December 2023 (177)
- January 2022 (293)
- February 2022 (329)
- March 2022 (358)
- April 2022 (292)
- May 2022 (271)
- June 2022 (232)
- July 2022 (278)
- August 2022 (253)
- September 2022 (246)
- October 2022 (196)
- November 2022 (232)
- December 2022 (167)
- January 2021 (182)
- February 2021 (227)
- March 2021 (325)
- April 2021 (259)
- May 2021 (285)
- June 2021 (272)
- July 2021 (277)
- August 2021 (232)
- September 2021 (271)
- October 2021 (305)
- November 2021 (364)
- December 2021 (249)
- January 2020 (272)
- February 2020 (310)
- March 2020 (390)
- April 2020 (321)
- May 2020 (335)
- June 2020 (327)
- July 2020 (333)
- August 2020 (276)
- September 2020 (214)
- October 2020 (233)
- November 2020 (242)
- December 2020 (187)
- January 2019 (251)
- February 2019 (215)
- March 2019 (283)
- April 2019 (254)
- May 2019 (269)
- June 2019 (249)
- July 2019 (335)
- August 2019 (293)
- September 2019 (306)
- October 2019 (313)
- November 2019 (362)
- December 2019 (318)
- January 2018 (291)
- February 2018 (213)
- March 2018 (275)
- April 2018 (223)
- May 2018 (235)
- June 2018 (176)
- July 2018 (256)
- August 2018 (247)
- September 2018 (255)
- October 2018 (282)
- November 2018 (282)
- December 2018 (184)
- January 2017 (183)
- February 2017 (194)
- March 2017 (207)
- April 2017 (104)
- May 2017 (169)
- June 2017 (205)
- July 2017 (189)
- August 2017 (195)
- September 2017 (186)
- October 2017 (235)
- November 2017 (253)
- December 2017 (266)
- January 2016 (164)
- February 2016 (165)
- March 2016 (189)
- April 2016 (143)
- May 2016 (245)
- June 2016 (182)
- July 2016 (271)
- August 2016 (247)
- September 2016 (233)
- October 2016 (191)
- November 2016 (243)
- December 2016 (153)
- January 2015 (1)
- February 2015 (4)
- March 2015 (164)
- April 2015 (107)
- May 2015 (116)
- June 2015 (119)
- July 2015 (145)
- August 2015 (157)
- September 2015 (186)
- October 2015 (169)
- November 2015 (173)
- December 2015 (205)
- March 2014 (2)
- March 2013 (10)
- June 2013 (1)
- March 2012 (7)
- April 2012 (15)
- May 2012 (1)
- July 2012 (1)
- August 2012 (4)
- October 2012 (2)
- November 2012 (2)
- December 2012 (1)