[Column] Tejpal Bedi: Regulating digital lenders in Kenya: The benefits for consumers and industries
In 2021, President Kenyatta approved an amendment that gives the Central Bank of Kenya powers to license and oversee previously unregulated digital money lenders. Citing technology advances and ongoing innovation in the sector, the monetary authority recognised the growth of lending through digital channels (particularly via mobile phones) as well as challenges that have accompanied this growth. Public concerns have included lenders engaging in predatory practices, high costs, and the abuse of personal information.
Referred to by President Kenyatta as long overdue, the amendment is a significant step forward for a sub-industry backed by Kenya’s reputation as a technological oasis on the African continent. Propelled into a space where state regulation is considered essential, the amendment is testament to the role of digital credit lending in the country, and it also introduces several benefits. Some of these benefits include safeguarding consumer and business rights, further legitimacy for existing providers, and oversight that results in improved and standardised quality levels of service.
Borrowing money in Kenya
High frequency and convenience define the state of digital credit lending in Kenya. During the last decade, the number of digital lenders and loans has grown exponentially. A FinAccess survey conducted between October and November 2018 showed that 13.6% of adults in Kenya had used a digital loan in the past year. For context, the same survey found that only 9% of adults reported using a traditional loan from a bank or non-bank financial intermediary.
Kenyans predominantly borrow money through their mobile phones. In the first quarter of 2020, there were around 10.2 million mobile loan borrowers (up from six million in Q4 2019), while approximately 92% of the total accounts opened during that quarter were for mobile loans. At the same time, mobile loans made up 75% of loan accounts offered by the banking sector. The prevalence of products such as Safaricom’s M-PESA shows just how popular (and necessary) these financial services are. Geared towards users who do not have bank accounts or have limited access to banking services, these mobile money services make up the backbone of finance in Kenya, accommodated by robust infrastructure and widespread mobile Internet connectivity. This is an environment that breeds innovation, but at the same time, it is one that can entice bad faith players and yield dubious, downright unethical industry practices.
Exploitation and other challenges
Fintech platforms can directly impact a person’s livelihood, helping to secure and manage the finances of people and businesses, while offering them peace of mind and convenience. However, like many other technologies, these platforms are subject to questions regarding security and privacy, and the threat of exploitation.
These problems are illustrated by stories of borrowers receiving countless phone calls of varying intensity, digital lenders requiring loan repayments within short periods of time, and exponential interest rates. Sharing loan defaulters’ personal data is also an issue, with Kenya going so far as to grant regulators the power to revoke operator permits that breach client confidentiality, in line with existing legislation, such as the Data Protection Act. Before licencing requirements, all it took to operate was to register, which in turn opened the door to rogue and unethical operators.
Kenya has entered a period of economic recovery. With loans from entities such as the World Bank and Equity Group Holdings, the future will depend on money going where it needs to go and recipients trusting the digital channels it flows through, making prudent regulation essential.
Oversight equals protection and legitimacy
So, what should digital lending look and feel like?
Adhering to licencing and operating requirements as set out by regulators, a good lending entity embraces transparency and dedication towards its clients. Thanks to cutting-edge infrastructure and Internet connectivity on a national level, the means to access and engage with these entities already exist. Legislation that acts as oversight in the sector can legitimise vendors and provide a level playing field for all, while reinforcing the protections that give consumers and businesses the assurance they need to execute their financial strategies to their full potential.
Kenya’s digital landscape is shaped by an understanding of the roles of both public and private sectors, working together to offer the best working environment possible. The digital economy has the potential to uplift citizens and businesses after an extended period of uncertainty, and address the numerous challenges they face both online and in the real world. Mobile money plays an important part in this. And with countless apps and companies claiming to offer the best financial solution, oversight is essential as we broaden our digital horizons.