What the regulated market for mobile digital loans will look like

Capital markets

What the regulated market for mobile digital loans will look like

The Central Bank of Kenya, Nairobi, Wednesday, December 30, 2020. PHOTO | DENNIS ONSONGO | NMG

Players in the digital lending industry now have two weeks to apply for licenses as consumers enter a new era where friends and loved ones will no longer be harassed by intrusive phone calls in the event of a payment default.

The Central Bank of Kenya (CBK) is expected to publish a list of compliant players by September 17 and shut down digital lenders that fail to comply with strict consumer protection rules introduced under the Digital Credit Providers Regulations, 2021.

Mobile phone lenders will also be required to disclose the total charges for their loans, including interest rates, late payments and rollover fees, before disbursing credit to customers.

The chairman of the Digital Lenders Association of Kenya (Dlak), Kevin Mutiso, says Kenyans should expect better services, tougher customer protection laws and fewer compliant players in two weeks. .

“Most people have applied and there are just a few small documents that are requested. We are expecting a memo from CBK with a list within two weeks, some names will be there, others will be filed,” he said. declared.

President Uhuru Kenyatta last December approved an amendment to the law allowing the central bank to regulate digital lenders, a move that gave the bank the power to curb lenders that violate consumer privacy.

Under the new rules, lenders were expected to provide the regulator with a certificate of incorporation, memorandum and articles of association of the applicant and that of any significant shareholders.

Directors, the chief executive, senior executives and significant shareholders would also be subject to a fit and proper test by the regulator, which would also require disclosure of the source of funds and pricing models.

The new law also gave the CBK the power to revoke the licenses of companies that send information about defaults to third parties as part of name-and-shame tactics intended to recover the money.

Not disclosing interest charges, late payments and rollover fees was also cited as a major issue for customers turning to digital loans due to their ease of access given that they don’t need collateral.

Most Kenyans are unaware of their rights and do not read loan terms when applying for credit.

This leaves them vulnerable to costly interest rates that increase by up to 520% ​​when annualized, triggering growing defaults.

The use of mobile loans has grown exponentially in recent years as low-income households have been attracted to easily accessible mobile loans.

The CBK told parliament that around 200,000 Kenyans borrowed money on their mobile phones in 2016, but that figure rose to 2 million in 2019, ten times that number.

Easily accessible mobile loans have aggressive collection methods, however, including being too quick to list borrowers for very small defaults.

The regulator has estimated that there are over 100 unregulated digital lenders that lack pricing transparency, exploit personal data and use aggressive debt collection methods.

Most mobile loan takers ignore terms that include the lifetime of SMS notifications, full handover of their personal data to third parties, and waiver of their right to dignity.

The lack of regulation meant that customer privacy was never guaranteed, as these digital lenders arbitrarily shared user data with third parties.

In addition, customers who defaulted on their loans faced endless reminder calls from debt collectors, who also used shameful tactics like calling friends and family to compel defaulters to pay.

CBK kicked digital lenders out of the credit information sharing mechanism for misusing credit reference bureaus to report small defaults below Sh1000 and used the mechanism to leverage loan recovery by threatening to list customers.

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Casey J. Nelson