Digital lenders that share personal data of loan defaulters, with third parties, risk license withdrawal in Kenya after lawmakers added a clause — granting the banking regulator the mandate to revoke permits of operators who breach customer confidentiality — to the new law passed by the country’s National Assembly.
Typically, loan apps collect borrowers’ phone data, including contacts, and demand access to messages to check the history of mobile money transactions — for credit scoring and as conditions for disbursing loans. Rogue lenders then use some of the contact information collected to recover the loans disbursed in cases where borrowers default. Reports indicate that digital lenders resort to debt-shaming tactics, like calling friends and family, to compel their borrowers to repay the loans.
The change adds to a raft of measures taken by Kenyan lawmakers to protect citizens from rogue digital lenders who offer high-priced collateral-free loans. It grants the regulator, Central Bank of Kenya, power to oversee the operations of standalone digital lenders (not affiliated with banks) after a period of self-regulation. Digital lenders will, going forward, be required to obtain licenses to operate in Kenya, unlike previously, when they just had to register — which led to the proliferation of rogue apps.
The Central Bank of Kenya amendment 2021 bill also gives the regulator the power to cap interest rates and to suspend or revoke the licenses of digital lenders that breach “the conditions of the Data Protection Act or the Consumer Protection Act.”
Kenya’s Data Protection Act requires firms to disclose to customers the reasons for collecting their data. It also ensures that borrowers’ confidential information is safe from infringement by unauthorized parties. This comes as consumer lobbies accuse loan apps of sharing customer information with data and marketing companies.
The digital lenders will also be required to reveal all the information concerning their products, and this includes details on pricing, penalties for defaulters and means of debt recovery. This is in line with the country’s Consumer Protection Act which requires sellers to disclose to consumers all the terms and conditions pertaining to the purchase of goods or services. Almost all lending apps were found to use debt-shaming tactics to recover debt in Kenya.
Kenya is home to about 100 mobile lending apps, including Okash and Opesa, both owned by the Chinese-owned browsing giant Opera, and which have faced claims of using predatory lending tactics in Kenya. Okash and Opesa are some of tens other loan apps that were found to charge exorbitant interest rates and to have exploitative terms — like issuing 30-day loans instead of the 60 days stipulated by Google Play Store policies. The interest rates of the two Chinese loan apps were exorbitant, reaching up to 876% annualized, rates yet banks’ yearly rates rarely exceed 20%. Other apps, including the San Francisco-based Branch International Ltd., and PayPal-backed Tala, were found to charge extortionist rates, with annualized interest rates of 156-348% and 84-152.4%, respectively.
The lenders’ lobby, which represents 25 digital lenders disbursing about $40 million a month, told TechCrunch that members expressed their concern over capping of the interest rate but said they were happy with the new law especially because their feedback was taken. The association lobbied for the removal of minimum capital requirements, deposit rations and for the regulator to cede control of innovation or new products.
“We are happy that the space is regulated now and that we are able to access the Central Bank (regulator) and mechanisms for dispute regulations have also been put in place. But price control is what concerns us and we are not happy with that — the moment you put an interest rate cap then there won’t be any lending. We are nervous about that but it is fair,” said the Digital Lenders Association of Kenya chairman, Kevin Mutiso.
But having regulations in place, Mutiso said, is going to help grow the lending space in the country as the lenders collaborate with partners including the regulator to make it more robust.
“Lack of regulation was making the market unpredictable, now we know what we can do and not do. And also, we are going to have better debt collection practices,” said Mutiso.
“The law, we believe, is going to make Kenya to be the number one fintech market in the world because everything is clear now — from what is expected from the lenders and the borrowers. We are also going to see better products for our customers especially the MSMEs (micro and small medium enterprises),” he said.
The apps offer collateral-free loans making them attractive to borrowers looking for quick cash, and who are often locked out by banks due to prerequisites such as account history.
While digital credit is easily accessible, its short tenure makes it expensive, while ease of access has led to borrowing from multiple apps resulting in debt distress and the reduction of credit scores — affecting the borrowers’ ability to obtain credit from banks in future.
A study by the Kenya Bankers Association shows that convenience and ease of access are the predominant reasons that customers take into account when making decisions on the platforms to access credit from.
It found that self-employed people prefer digital to conventional credit attributable to liquidity changes that they encounter while in their line of business, pointing to how loan apps are preferred during emergencies too.
The new law gives the regulator powers to determine the pricing parameters that will be followed by the digital lenders when setting the cost of credit.
Exorbitant interest rates are not unique to Kenya; in India, loan apps were found to charge interest rates as high as 60% per week. There were reports of people committing suicide after harassment by loan-recovery agents in the south Asian country.
West African countries have also witnessed the proliferation of loan apps, with Nigeria among the largest markets in the region.
A report by the Consultative Group to Assist the Poor (CGAP), a research and advocacy organization, also found digital loan default rates and delinquency high among 20 million borrowers in Tanzania. It reported that most borrowers used the loans for daily needs instead of emergencies or for investments.
“One of the most important things regulators can do to reduce these numbers is to improve transparency on loan terms and conditions, making it easier for customers to make informed decisions,” said CGAP.
The organization recommended more stringent rules to govern loan apps and called for transparency on loan terms among lenders.