EA regulators move to streamline operations of digital creditors

Saturday May 18 2024

The region’s financial sector regulators have moved to rein them in with measures to protect borrowers. PHOTO | SHUTTERSTOCK


East Africa’s financial sector regulators are working towards instilling sanity in the operations of digital moneylenders, who have been accused of exploiting borrowers in loan pricing and their manner of recovering bad debts.

The region’s financial sector regulators have therefore moved to rein them in with measures to protect borrowers.

The Bank of Tanzania (BoT) has banned the provision of loans on digital platforms and cautioned the public against dealing with unlicensed digital moneylenders. The regulator also demanded that these digital lenders furnish borrowers with copies of duly signed loan contracts.

“The prohibition to engage in lending business without a licence includes provision of loans through various platforms such as digital loans,” BoT Governor Emmanuel Tutuba said in a public notice dated May 13, 2024.

“The public is hereby reminded to review the loan agreement to be entered into, including understanding and agreeing to the loan terms and conditions, and be satisfied that the lender has a valid license from the Bank to conduct the business. The borrower should be issued with a copy of a duly signed loan contract, and the same should be provided whenever the lender grants a new loan.”

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Tanzania’s Microfinance Act 2018 gives the BoT power to license institutions, companies and individuals to engage in the business of lending.

“The bank urges the public to refrain from doing business with institutions, companies, and individuals that provide lending without valid licence issued by the Bank of Tanzania,” Mr Tutuba said.

“The public is urged to report to the Bank of Tanzania and security organs institutions, companies, and individuals conducting lending business without valid license or without adhering to regulatory requirements to facilitate initiation of necessary legal actions.”

In Uganda, the digital moneylending business is flourishing, buoyed by the minimum requirements of merely providing personal information rather than substantial collateral that traditional banking institutions demand.

The number of digital lenders in Uganda stood at over 2,132 as of May 2023.

But a majority of these have landed into trouble with the government because of tracking down borrowers’ personal information in the event of loan default.

While applying for a mobile loan, these apps require access to the borrower’s phone book and call log and have been accused of threatening borrowers’ contacts with unspecified consequences.

Many of these firms are now under investigation by the Personal Data Protection Office, Uganda Microfinance Regulatory Authority (Umra) and police for data mismanagement, identity theft, high interest rates and hidden fees.

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In January, the Finance ministry suspended issuance of operating licences to digital moneylenders pending regulation of their operations by the Treasury.

The government argued that many of the lenders are untraceable due to their lack of physical addresses and that they charge exorbitant interest on their loans that reach 30 percent in case of default.

In addition, the Treasury says, some companies do not have a strong regulatory structure in place to control digital lending, which has allowed dishonest lenders to charge astronomical interest rates, trapping borrowers in debt.

In response, the UMRA benchmarked these businesses’ viability on Kenya’s [experience] and then drafted some guidelines to control them.

The measures include prohibiting them from imposing penalties on delinquent clients, which surpass 50 percent of the loan amount.

The rules also require digital moneylenders to acquire operating licences, physical addresses and provide information on consumer data protection and anti-money laundering procedures.

In Kenya, the Central Bank introduced the Digital Credit Providers Regulations as part of the amendments on the CBK (Amendment) Act, 2021 to rein-in rogue digital lenders.

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The regulations, which were gazetted in March 2022, stipulate severe penalties, including suspension or revocation of the operating licences for lenders flouting the rules.

The rules require digital lenders to apply for annual operating licences upon fulfilment of certain conditions, including the provision of the applicant’s credit policy, code of ethics and market conduct, pricing model and parameters and corporate governance policy to protect borrowers from exploitation.

They are also required to demonstrate proof of their Anti-Money Laundering and Combating Financing of Terrorism policies.

In assessing licence application, the central bank considers the history of the applicant, the professional and moral suitability of the persons proposed to manage or control the digital credit provider, the sources and evidence of funds to be invested by or in the digital credit provider and the public interest.

The regulations provide that CBK suspend or revoke the licence of the digital moneylender if it conducts its business in a manner detrimental to the interests of its customers or the public.

The regulations provide that a digital credit provider be approved by the CBK from time to time and that it invite or collect deposits in any form, including the taking of cash collateral as security for loans, in the course of carrying out digital credit business.

The regulations require that a digital credit provider to practise sound corporate governance principles based on ethics and integrity, good reputation and legitimacy, sound risk management and compliance with the law.

“A digital credit provider shall put in place appropriate policies, procedures and systems to ensure the confidentiality of customer information and transactions,” the rules say.

“A digital credit provider submitting credit information to a bureau shall ensure that such information is timely, complete and accurate,” the regulations say.

“A digital credit provider who intends to furnish negative information to a bureau with respect to a customer shall, in writing or through electronic means, notify the customer of the intention to submit the negative information at least 30 days before submitting the negative information to the bureau or within such shorter period as the contract between the digital credit provider and the customer may provide.”