Mobile loan borrowing has been on the rise across Kenya. With growing smartphone availability and easy access to mobile money transfer and quick application turnaround, digital credit has sky-rocketed in this country. Mobile company Safaricom’s M-Pesa is a well-known example. It is no surprise; therefore, that digital lending has developed so strongly in Kenya.

However, it’s not all roses as digital lending is a double-edged sword; helping but also hurting many. The sad truth is that credit through mobile applications has caused many borrowers to sink into debt. Though digital loans are so alluring, many Kenyans are caught in a vicious cycle of endless debt woes. Though these loans seem to be a quick fix for many cash-strapped Kenyans; there are questions about whether borrowers are being abused in the process. Digital lending has come under scrutiny, criticized as a financial catastrophe pushing thousands of Kenyans into debt while gaining profits from their woes.

The speed and ease of access to credit through mobile applications have caused a lot of careless borrowing.  Plus – these loans are so expensive despite their small size. Interest rates are high some as high as 43 percent and borrowers are charged for late payments. Sadly, it is not always clear to customers what they will have to pay in fees and interest rates or what other terms they have agreed to. This leads to a large number of defaulters; being unable to service their loans.

In this country, at least two out of every ten digital borrowers struggles to repay their loan. This is twice the rate of non-performing loans in commercial banks.

As the digital lending industry balloons, experts have pointed out that customers are usually confused about loan terms and conditions, hindering fintech firms’ potential to advance financial inclusion. This has seen officials including Central Bank of Kenya governor Patrick Njoroge, criticize these platforms, saying they were “displaying shylock-like behavior while hiding behind nice-looking applications.” The Governor compared mobile lending firms to ‘shylocks’ over what he described as their predatory instinct citing the high-interest rates at which they dish out loans to Kenyans.

And closely related to the point above, is the issue of disclosure. Due to easy accessibility borrowers often take up loans carelessly without fully understanding the terms and conditions. Digital loan disclosures should be prominent to borrowers before they borrow which should include key terms and all conditions for the lending products, such as costs of the loan, transaction fees on failed loans, and any other borrower responsibilities. Pricing on the platforms remains high, partly because of the repayment models of lenders and the multiple fees incurred during transfers and cash-outs. To boost transparency around transaction fees, the Competition Authority of Kenya has mandated that mobile financial services providers disclose charges.

The ease of accessing mobile lending and the lack of comprehensive understanding of its risks have also meant the growth of negatively-listed users with the Credit Reference Bureau. Research shows that in the last three years, at least 2.7 million Kenyans have been negatively listed with 400,000 of those listed for an amount less than 1000 shillings. This has been brought about by the rise of gambling and sports betting in Kenya: Financial experts in Kenya have revealed digital borrowers are twice as likely to engage in mobile betting.

Moreover, borrowers lose their privacy as this lending model makes them unknowingly surrender important parts of their personal data to third parties and waive their rights to privacy. Data privacy and ownership have also started to emerge as a concern with digital lenders. And with no data privacy law, there’s a concern over how Kenyan consumers’ digital footprints are used. As a matter of fact, many lending firms are being accused of intimidation and breaching their customers’ privacy.

So, what can be done to improve the system so that everyone benefits?

First, even though digital loans are of low value, they may represent a significant share of the borrowers’ income. This means they will struggle to repay them. Overall, the use of high-cost, short-term credit primarily for consumption, coupled with penalties for late repayments and defaults, suggests that digital lenders should take a more cautious approach to the development of digital credit markets.

Second, some digital lenders are not regulated by the Central Bank of Kenya. In general, digital credit providers are not defined as financial institutions under the current Banking Act, the Micro Finance Act, or the Central Bank of Kenya Act. Permissive regulations have been partly to blame too with huge amounts of credit in Kenya now accessible outside the purview of state supervision. One key gap is the regulation of lending in Kenya is done through institutional form and not by activity.  So given digital lenders do not accept customer deposits as banks and SACCOS do, they are not subject to the same licensing or regulations. Perhaps digital lending regulations could be implemented by an independent consumer protection agency or at least an independent department in a regulator with an expanded mandate to cover non-banks. Third, with over 40 lending platforms in Kenya including Safaricom’s M-Shwari loan service, it is imperative that the lenders are monitored and evaluated for viability and compliance. Many mobile lending platforms are privately held; some are foreign-owned and are not subject to public disclosure laws. In essence, to protect digital borrowers regulation holds the key.