The Central Bank of Kenya’s ongoing efforts to regulate its digital lending sector have taken an important step forward, with the first lenders successfully receiving a license to operate in the sector.
Kenyans will see this is an important towards eliminating the poor compliance and predatory practices that have seriously damaged the reputation of digital lenders among Kenyan borrowers.
For the national regulator, which only received the power to oversee the lending sector in December 2021, this is also a big step. In being choosy about the firms to which it issues licenses, the CBK is stamping its authority over a sector that has previously been lightly regulated.
A new sheriff in town
The Central Bank Amendment Act of 2021 saw Kenyan legislators finally define regulatory standards for digital lenders and bolster the Central Bank of Kenya’s power to act as sheriff to the Kenyan fintech lending sector’s Wild West.
In March 2022, the bank published fresh regulations requiring all digital lenders to apply for licenses within six months to continue operating.
In a press release in September 2022, the CBK revealed that out of 288 applications, the first 10 digital credit providers have received regulatory approval, with more set to follow on a month-by-month basis. This may seem like slow going, but it speaks to the problems created by the previous lack of regulation.
Building trust
Kenya’s digital lending scene has been beset by serious trust and compliance issues.
High interest rates, large levels of debt, unethical and predatory collection practices, and abuse of personal data mean few Kenyans trust the digital lending options available to them/
In one of the most blatant examples of unethical practice, some Kenyans have reported that lenders are accessing their mobile phone address book to contact friends and family members, asking them to remind the borrower to make repayments.
Many of the new regulations set by the CBK specifically target these predatory practices. From now on, lenders must:
- Refrain from the use of threats or violence
- Avoid the use of obscene of profane language
- Make unauthorised or unsolicited calls to a customer’s contacts
- Use improper debt collection tactics
- Conduct any other action to harass or abuse a person in connection with debt collection.
Those that fail to meet these rules will be denied accreditation.
These regulatory provisions focus on creating trust and transparency between creditors and customers. Digital lenders must now work harder to ensure the confidentiality of customer data, obtain each customer’s consent before submitting or sharing credit information, and must also have at least one physical office.
However, this additional restriction on sharing credit information makes it much more difficult for lenders to report borrower repayment data to credit bureaus. This, in turn, will make it harder for lenders to access information about potential borrowers and therefore make good risk assessments for new customers. This may have unintended consequences; in particular it has the potential to make fraud more prevalent and seriously restrict the flow of capital in the country.
Plaudits and perils
On the surface, these regulations are a positive step. Kenyan consumers will, in theory, no longer be subjected to threats, intimidation, and shaming from predatory lending organisations.
However, these regulatory efforts have not won universal acclaim.
In the immediate term, there are fears it will result in a drop in the profitability of credit products and drive an increase in bad loans as collections will be more difficult to enforce.
And by being so firmly on the side of the consumer, the Central Bank of Kenya could hamstring long-term growth by restricting lenders’ ability to operate and lend to those who need it. By adding to great a regulatory burden on firms, they may no longer be able to profitably underwrite loans to people with little or no credit history.
Although few will deny the need to crack down on predatory behaviour, regulation must not restrict the ability of the lending market to effectively deliver credit to consumers. Kenyan legislators have an important balancing act to perform.
