Kenya is grappling with a dilemma in regulating digital lenders who have left millions of poor trapped in debt.
The consensus is that the digital lenders, which are operating in a chaotic environment earning the dubious distinction of credit sharks or shylocks, need taming through regulation.
Central Bank of Kenya Governor Dr Patrick Njoroge has repeatedly said the fintech firms cannot be allowed to continue wreaking havoc in the financial services sector under the guise of filling a vacuum created by interest rate capping and the drive to universal financial inclusion.
But Kenya is finding it difficult to regulate the mobile-based fintech firms, as they cut across the financial services sector regulated by the CBK and the telecoms sector regulated by the Communications Authority.
The fact that digital lenders are non-deposit-taking has left the CBK relying only on the guidelines in the Banking Charter.
The Competition Authority of Kenya, which is mandated to protect consumers from unfair and misleading market conduct, which is rampant among the digital lenders, is also at a loss over how to rein in the lenders.
The push to regulate fintechs has resurrected memories of plans to regulate Safaricom mobile money service M-Pesa and other mobile money service providers over a decade ago which came a cropper after the CBK and the Communications Authority failed to agree and the government opted not to pursue the enactment of the necessary regulations.
The legal lacuna has given room to the mobile-based lenders who are being blamed for the rising number of suicides by borrowers some of whom are unable to repay as little as $2.
Dr Njoroge says that as regulator of commercial banks and deposit-taking microfinance institutions, the CBK will ensure that “merchants do not take advantage of Kenyans who are seeking quick loans.”
But the lack of regulations on non-deposit-taking institutions has made it impossible for the CBK to protect borrowers, as rogue lenders perpetrate data violation, fraud, lack of transparency and full disclosures, negative credit reference bureau listings and unethical practices in debt collection.
The industry estimates there are seven million borrowers in Kenya procuring loans from more than 50 digital lenders, with the average loan size being $40 and interest rates up to 150 per cent.
The alarming statistic, however, is that about half a million Kenyans digital borrowers have been blacklisted by credit reference bureaus.
But commercial banks are recording booming business from the digital lenders, with 80 per cent of digital loans coming from them.
Last year, when the industry recorded a significant boom, digital lenders extended $250 million in loans, with commercial banks providing $200 million for on-lending. The remaining $50 million is from investors, most of whom are foreign.
The fact that foreign-owned lenders repatriate profits is also fuelling accusations that fintechs are not living up to the promise of alleviating poverty in Africa.
“There is little doubt that fintech has the potential to liberate enormous value. But the core problem as it stands is that the bulk of this value does not go to the poor.
“Rather, fin-tech is very clearly designed to hoover up value and deposit it into the hands of a narrow global digital-financial elite that are the main forces behind the fintech revolution,” says a report on fintech.
With the government and regulatory bodies unable to police the sub-sector, the players have been forced to seek self-regulation in the face of a reputational crisis.
Three months ago, 12 lenders established the digital lenders association and have come up with a code of conduct which they say is anchored in consumer protection.
“The code requires digital lenders to practice responsible lending, disclose standardized pricing, improve transparency and fairly resolve customer disputes while respecting the spirit of self-regulation and raising the bar on ethical lending,” said Masinde, the chair.
Though DLAK contends that it has put in place a disciplinary mechanism for non-compliance with the code, the fact that only a third of the digital lenders are members casts doubt on the industry’s commitment to self-regulate.
Robert Masinde, Digital Lenders Association of Kenya chairman, says they are concerned by the many cases of malpractices and violation of consumer protection and “we would welcome any regulation that create and enforce industry standards so as to professionalise digital lending.”