Arguably, digital lending providers have helped narrow the financial inclusion gap by (in their own seemingly insignificant way) providing “unlimited’ access to credit facilities for people that are mostly ignored by the traditional banking system as a result of poor creditworthiness, inappropriate or no collateral and a handful of other reasons.
The advent of digital lenders changed the game. These lenders also referred to as microloan companies have made access to loan facilities easier than reading the alphabet. They do not require collateral and still offer loans to people with little or no creditworthiness – in fact, these set of people make up their target. Since their appearance, they have provided loans to people and have helped to raise the level of financial inclusivity in Africa.
Although they have provided credit facilities to a lot of businesses and individuals, over the years, there have been accusations that these digital lenders were operating unethical practices (exploitative interest rates, and debt-shaming recovery tactics), sharing customers’ data and were a big money laundering scheme.
With these digital lenders having the potential to become curate’s eggs, governments across Africa are starting to look at ways to regulate them and the sector.
Kenya’s financial regulator on Monday published new regulations to guide how digital lenders operate in the country. Primarily, digital lenders operating in the country will henceforth, have to declare the sources of their funds as well as provide evidence of their sources. The Central Bank of Kenya also said that digital lenders must acquire a license before they can operate in the country or shut down all operations by September 22nd, 2022.
Prior to now, digital lenders didn’t require a license to operate in the country. All they needed to do was to register their businesses and they could go about operating in the country.
There exist more than 100 lending apps/platforms in Kenya. These platforms are famous for providing instant and unsecured loans accessible via the smartphones of users upon request. Some of these platforms that are widely used in Kenya include Branch, Tala, Zenka Finance, Opesa, Okash, Credit Hela, etc.
Kenya’s apex bank emphasized that it wasn’t against the operations of these digital money lenders or was it trying to shut the sector up. It hammered that disclosing the sources of funds by digital lenders is to make sure that they are not a cover-up for or being used for criminal activities such as money laundering. “A digital credit provider shall provide to the Bank (CBK) the evidence and sources of funds invested or proposed to be invested in the digital credit business and demonstrate that the funds are not proceeds of crime,” part of the regulations read.
Usually these digital lenders source funds from commercial banks, development financial institutions, private equity firms, and individual investors, but there have been reasons to believe that digital lending may be a cover-up for money laundering schemes.
The new regulation follows President Uhuru Kenyatta’s consent to the Central Bank of Kenya’s Act to issue licenses to digital money providers in the country. The act which came with the aim of regulating the long-standing digital lending space came to ensure “the existence of fair and non-discriminatory practices in the credit market.”
The new law aiming to regulate digital lending is a big win, especially for users in the space. Following the new law, these lenders will have to share information of their source(s) of funding, conditions, fees, interest rates and total amount to be paid back for loans and must always seek the approval of the country’s apex bank before they can change any of the aforementioned.
Another aspect that has been an issue is the sharing of customers’ details with third parties. The new central bank law bans digital lenders from sharing the information of their users with third parties. Henceforth, they also are not to threaten users, access and contact the contacts of users or use questionable tactics when trying to recover loans. “The Regulations seek to address concerns raised by the public given the recent significant growth of digital lending, particularly through mobile phones. These concerns relate to the predatory practices of the previously unregulated digital credit providers, and in particular, their high cost, unethical debt collection practices, and the abuse of personal information,” Kenya’s central bank said.
The apex bank also added that “The Regulations provide for inter alia the licensing governance, and lending practices of DCPs. They also provide for consumer protection, credit information sharing, and outline the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations of DCPs.”
By the 22nd of September 2022, digital lenders are expected to have acquired a license if they plan to continue to operate in Kenya as well as make the necessary changes mentioned in the new regulations. Defaulters who fail to acquire a license and/or adhere to these new regulations risk the withdrawal of their licenses and/or other penalties.
The actions being taken by the Kenyan government reminds us of similar actions taken by the Nigerian government last year with the aim of curbing the excesses of digital lenders in the country. For instance, last year, the National Information Technology Development Agency (NITDA) fined Soko Loan – a microloan platform, the sum of N10 million for privacy invasion. The microloan platform was found guilty of illegally tampering with the data of users. Essentially, Soko Loan took access from their users’ phones without their permission and kept texting their contacts when they failed to pay their loans. Apart from the N10 million fine, the NITDA ordered the loan platform to stop sending messages to the contacts of users.
In essence, if not regulated or monitored, digital lenders have huge potential of going south with their operations. They could go as far as oppressing users who may have little or no choice but to use them as they cannot access these services from banks. This is why the government has to come in to ensure that digital lenders are not operating beyond their measure and are making life easier for people with their products and services.