In the past decade, numerous mobile lending apps have been launched in Kenya, riding on the growing need for quick loans.
However, these startups have been operating in an unregulated environment — until today, when the country’s president, Uhuru Kenyatta, approved a new law that gives the country’s monetary authority, the Central Bank of Kenya (CBK), the power to regulate the industry and take action on those that violate consumer privacy.
“The amended Central Bank Act, 2021, gives the Central Bank of Kenya authority to license digital lenders in the country as well as ensure the existence of fair and non-discriminatory practices in the credit market,” said the president’s office.
Under the new legislation, lenders are required to apply for licenses from the CBK, as compared to previously, when they only had to register to set up operations in the East African country.
The lack of regulation meant that customer privacy was never guaranteed as these digital lenders arbitrarily shared user data with third parties. Besides, customers defaulting on loan repayments faced unending reminder calls from debt collectors, who also used shaming tactics like calling friends and family to compel defaulters to pay.
Almost all lending apps were found to use debt-shaming tactics to recover debt in Kenya. They have also faced claims of using predatory lending tactics.
The digital lenders will have six months to apply for the licenses.
“Any person who before the coming into force of this Act was in the digital credit business and is not regulated under any other law, shall apply for a license… within six months of publication of the regulations,” according to a clause in the newly passed law.
Digital lenders are preferred by borrowers in emerging markets, who are often unbanked and have no access to financing from conventional banking institutions.
Besides, loan apps offer collateral-free loans but they are also high-priced, with some annualized interest rates going up to 876%, according to this report that published findings of the exorbitant and predatory pricing strategies of the Chinese-owned Okash and Opesa loan apps.
Other loan apps with a presence in Kenya include San Francisco-based Branch International Ltd., and PayPal-backed Tala.
The loan apps will be expected to observe customer confidentiality by adhering to “the conditions of the Data Protection Act or the Consumer Protection Act”, or risk license withdrawal.
Kenya’s Data Protection Act ensures that borrowers’ confidential information is safe from infringement by unauthorized parties and requires firms to disclose to customers the reasons for collecting their data. The lending apps have earlier been accused of sharing customer data with allies and marketing companies.
Usually, 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, however, use some of the contact information collected to recover the loans disbursed in cases where borrowers default, or for marketing purposes.
Going forward, the mobile loan apps will be required to reveal all the information concerning their products including details on pricing, penalties for defaulters and the modalities of debt recovery.
This is per Kenya’s Consumer Protection Act, which requires sellers to disclose to consumers all the terms and conditions pertaining to the purchase of goods or services.