Kenya Cracks Down on Digital Lenders

Kenya Tightens Regulations on Digital Lenders

Digital lenders in Kenya who improperly share the personal data of loan defaulters with third parties now face potential license revocation. This follows the addition of a new clause to recently passed legislation, granting the banking regulator the authority to revoke the permits of operators violating customer confidentiality.

Data Collection Practices and Concerns

Loan apps commonly gather extensive phone data from borrowers, including their contact lists, and request access to message histories to assess mobile money transaction patterns for credit scoring purposes. This data collection is often a prerequisite for loan disbursement.

Unfortunately, some lenders misuse this collected contact information to pursue loan recovery, resorting to practices like contacting friends and family – a tactic known as debt-shaming – to pressure borrowers into repayment.

New Regulatory Measures

This legislative change is part of a broader effort by Kenyan lawmakers to safeguard citizens from unethical digital lending practices, particularly those involving high-cost, unsecured loans.

The Central Bank of Kenya (CBK) will now have the power to oversee standalone digital lenders – those not affiliated with traditional banks – after a period of self-regulation. Going forward, these lenders will be required to obtain licenses to operate, a more stringent requirement than the previous registration process which contributed to the rise of problematic apps.

Powers Granted to the Central Bank

The Central Bank of Kenya amendment 2021 bill empowers the regulator to cap interest rates and suspend or revoke licenses from digital lenders that violate the Data Protection Act or the Consumer Protection Act.

Kenya’s Data Protection Act mandates that companies disclose the reasons for collecting customer data and ensures the security of borrowers’ confidential information against unauthorized access.

Transparency and Disclosure Requirements

Digital lenders will be obligated to fully disclose all information regarding their products, including pricing details, penalties for late payments, and debt recovery methods. This aligns with the Consumer Protection Act, which requires sellers to provide complete terms and conditions to consumers.

Investigations have revealed that debt-shaming tactics are widespread among lending apps operating in Kenya.

Specific Lenders Under Scrutiny

Kenya is currently home to approximately 100 mobile lending apps, including Okash and Opesa, both owned by Opera, a Chinese browsing company. These apps have been accused of employing predatory lending practices.

Both Okash and Opesa, along with numerous other apps, have been found to charge exorbitant interest rates and impose exploitative terms, such as offering 30-day loans instead of the 60-day period stipulated by Google Play Store policies. Their annualized interest rates have reached as high as 876%, significantly exceeding the typical 20% annual rate offered by banks.

Other apps, like Branch International Ltd. (San Francisco-based) and Tala (backed by PayPal), have also been identified as charging excessively high interest rates, ranging from 156-348% and 84-152.4% annually, respectively.

Industry Response and Concerns

The Digital Lenders Association of Kenya, representing 25 lenders who collectively disburse around $40 million monthly, has expressed concerns about interest rate caps but generally welcomes the new law, particularly the inclusion of industry feedback.

The association successfully lobbied against minimum capital requirements, deposit ratios, and regulatory control over innovation or new product development.

Future Outlook and Debt Collection

“We are pleased that the sector is now regulated and that we have access to the Central Bank and mechanisms for dispute resolution,” stated Kevin Mutiso, chairman of the Digital Lenders Association of Kenya. “However, we are concerned about price controls, as capping interest rates could stifle lending.”

Mutiso believes that the new regulations will foster growth within the lending space, encouraging collaboration between lenders and the regulator to enhance its robustness.

“The lack of regulation created an unpredictable market. Now we understand what we can and cannot do, and we will have improved debt collection practices,” Mutiso added.

Potential for Fintech Leadership

“This law has the potential to position Kenya as the leading fintech market globally, as expectations for lenders and borrowers are now clearly defined. We anticipate the development of better products for our customers, especially MSMEs (micro and small medium enterprises),” he explained.

Accessibility and Risks of Digital Credit

These apps offer collateral-free loans, making them appealing to borrowers seeking quick access to funds, particularly those who may be ineligible for traditional bank loans due to a lack of credit history.

However, the short loan tenures often result in high costs, and the ease of access can lead to borrowing from multiple apps, causing debt distress and negatively impacting credit scores, hindering future access to bank credit.

Borrower Preferences

A study by the Kenya Bankers Association revealed that convenience and ease of access are the primary factors influencing customers’ choice of credit platforms.

The study also found that self-employed individuals favor digital credit due to fluctuating income, and that loan apps are frequently used to cover emergency expenses.

Global Context and Regulatory Trends

The new law grants the regulator the authority to establish pricing parameters for digital lenders.

High interest rates are not limited to Kenya; in India, loan apps have been found to charge rates as high as 60% per week, leading to reports of suicides linked to harassment by loan recovery agents.

West African countries have also experienced a surge in loan apps, with Nigeria being a major market in the region.

CGAP Recommendations

A report by the Consultative Group to Assist the Poor (CGAP) found high default and delinquency rates among 20 million borrowers in Tanzania. The report indicated that most borrowers used the loans for daily needs rather than emergencies or investments.

“One of the most crucial steps regulators can take to address these issues is to improve transparency regarding loan terms and conditions, empowering customers to make informed decisions,” stated CGAP.

The organization recommends stricter regulations for loan apps and increased transparency in loan terms among lenders.