Why It Is Unwise To Restrict Digital Lenders In Kenya

There is a heated debate that has been going on across social media platforms in the past week on whether to regulate or restrict digital lenders in Kenya. The opponents and proponents of the matter seem to be torn in between the two semantics.

This Friday (28/5/2021) marks the deadline that the National Assembly had issued to Kenyans to present their views on the proposed changes on the Central Bank of Kenya Act to include the regulation of digital lenders in Kenya. Not clear whether Kenyans have done so.

The Bill was re-introduced to the House by the Chairperson of the Departmental Committee on Finance and National Planning Gladys Wanga. Even among the legislators, there is a divided and heated opinion concerning the matter.

The Bill seeks to have the CBK regulate mobile lenders in Kenya who have been accused of operating without following the rules. Proponents of the Bill feel that digital lenders have taken advantage of “being free” to “frustrate Kenyans.”

“This legislation arises from the need to ensure fair and non-discriminatory marketplace for access to credit through a legal framework to regulate digital borrowing platforms,” said the National Assembly in a notice to the public. The Bill has already been presented and has gone through the First Reading in the National Assembly

Read More:

• Statement On Proposed Changes In The Central Bank of Kenya (Amendment) Bill, 2021
• We Not Against Regulation By CBK – Digital Lenders

Even as the debate on whether to regulate or restrict digital lenders in Kenya rages on, we should not forget that Kenya has been leading 20 other African countries as the giant in financial inclusion for the last 10 years.

We should not forget that the milestones in financial inclusion have been attributed to digital finance providers who have been responsible for lending to individuals and micro-businesses.

Financial inclusivity is essential as an open market can lead to some members of the society being excluded due to non-standardized practices. Digital financial providers understand that regulation is the way to get a win-win outcome.

Digital finance providers not only provide emergency cash to Kenyans but also financial education, a case of not just giving the customer fish but showing them how to fish too. Thanks to the evolution in technology, Kenya’s financial sector has taken a shift.

Read More:

• Digital Lenders Key For Financial Inclusion In Kenya
• Branch Mobile Loan App Goes Into Mainstream Banking, Buys Majority Stake In A Kenyan Bank

But why are Kenyans borrowing from digital lenders more than from commercial banks? First, nobody is forcing Kenyans to borrow from these digital lenders. Kenyans are borrowing from their own free will to meet their financial demand.

The truth is Kenyans love digital lenders because the lenders “trust” them more as compared to the mainstream lenders. With digital lenders, there is no security required. They do not ask for a logbook or a title deed from borrowers.

It is purely on trust. Some like Tala have been lending as much as 70,000 shillings to individuals without asking for any security. By the way, the only hope for digital lenders to get their money was by using the CRB. But the CBK took away this power from them.

There are at least 12 reasons why Kenyans borrow from digital lenders:

• Business
• Day-to-day needs
• Education
• Airtime
• Pay bills
• Personal/household goods
• Medical emergency
• To try it out
• To lend to others
• Repay other non-mobile loans
• Repay other mobile loans
• Betting

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Kenya has about 500 digital lenders targeting at least 6 million active digital borrowers. The lenders have been accused of using hiked interest rates to make money out of the desperate borrowers.

Most of the Kenyan digital borrowers are taking loans from more than one digital lender. Currently, 14 percent of digital borrowers are repaying multiple loans.

Kenya’s digital credit providers have developed different models to score and deliver credit to customers.

But are digital lenders against being regulated? No. In fact, the Digital Lenders Association of Kenya (DLAK) has said that its members are not against the regulation of the sector.

The Association said that it has never been against being regulated because it is only through rules and laws that order is achieved.

“We welcome regulation because it is a sign that the market is maturing. We are not against the regulations as some people might think,” said Mr. Kevin Mutiso from the Digital Lenders Association of Kenya.

According to the Digital Lenders Association, hasty over-regulation of digital lenders will choke off financial access for those individuals and small business owners needing it most.

“Regulation and no restriction is the best way to manage the digital financial providers’ space to ensure that small businesses don’t lose this critical cash source,” said the Association in a statement.

The Association believes that regulation should be approached with the customer in mind. Over 7 million Kenyans use digital financial providers and any guidelines put in place should be for the benefit of this silent majority.

There is a need for a reasonable and balanced regulation that will foster sustainable digital finance innovation for Kenyans. Digital financial access regulation should be approached with the future in mind.

The future of the industry, the future of the economy, and the future of the customers. It should be bigger than the here and now.

“We have seen lives changed for the better through access to digital financial products. When regulated fairly, this could be a continued option for the new-age entrepreneurs who have grown up with access to digital solutions,” said Digital Lenders Association.

Part of the statement from DLAK

We would like to suggest that regulation should focus on the registration process instead of licensing. This is a common practice for the Digital Lenders regulations implemented in significant jurisdictions in the EU like Spain and Poland, we can also find such regulation in Australia.

The above is supported by the conclusions of the recent comparative study on the regulation of digital lending prepared by PwC. The presented reports show that the licensing in relation to Digital Lenders is too heavy for this type of activity.

Typically Digital Lenders are small companies with a maximum of 30 employees. Thus, the best solution is to use a regulatory system that will fulfill its task and make the legislator feel comfortable with the applied solution, but at the same time will not cause a significant increase in the operating costs of a company, nor will it be a complicated and highly formalized process.

Additionally, the legislator has used in the said Regulation the term “registration” in section 57 (3) (a) and 59 (2).

We propose that the register should be managed by the CBK. Digital Lenders shall be obliged to update the data contained in the register. In the event of any changes to the data disclosed in the register digital lender must notify the CBK immediately. The changes should be reflected in the register.

The registration shall be done only if the Digital Lender will fulfill the requirements indicated in the Regulation. The registration should be granted indefinitely.

The Digital Lender can be removed by the CBK from the register only if:

The requirements to obtain the registration are not met, or

At the digital lender’s request.

Consumer protection

As Digital Lenders completely absorb 100% of the risk in lending to their customers and do not rely on deposits as collateral, they employ the principle of risk-based pricing where different interest rates are provided to different consumers based on their creditworthiness.

Risk-based pricing looks at factors associated with the ability of the customer to pay back the loan and their borrowing habits.

 We propose that all customers shall be provided with clear, transparent, and articulated information on the pricing of the loans before they apply for the loan by providing the conclusion of the loan agreement in the unified form with the key financial information concerning the loan. This solution is implemented in all EU countries, but also we can find it in Uganda.

Additionally, in order to increase consumer protection, we propose to establish a position of a financial ombudsman within the CBK structures, responsible for examining customer complaints.