In recent times, the Central Bank of Kenya Governor Patrick Njoroge has noted that there are risks to Kenyans who use their mobile phones to take loans thus a need for regulation in the booming digital credit sector. Whilst many of these small digital credit loans are extremely valuable for people facing emergencies, managing cash flow problems, or small-scale trading, there are significant downsides that deserve attention. The CBK Governor has concerns with the notion of Kenya being “a guinea pig” for new technology introduced by foreign companies. However, the three largest digital credit lenders; M-Shwari, EazzyLoan, and KCB M-PESA are Kenyan entities.

Historic Origin of Digital Lending in Kenya

It is fair to say that in Kenya, as in many other African countries, the development of digital credit was sponsored by international development agencies. This was done with good intentions, albeit with little foresight to the unintended consequences. The continued celebration of the number of loans issued without reference to their quality is alarming. Self-regulation is an industry practice common in addressing various industry issues, from establishing professional standards to developing, setting, and applying a code of professional ethics and enhancing consumer confidence.

One of the most remarkable examples of self-regulation commonly referred to is that within the accounting discipline where a group of accountancy firms has come up with industry rules that govern the profession under the International Accounting Standards Board which has become transnationally incorporated.

Here comes the Digital Lenders Association of Kenya (DLAK)

To delve into the subject of discussion, leading digital lenders in the country have announced the launch of the Digital Lenders Association of Kenya to promote industry best practices and drive a coordinated approach to address emerging industry issues.

This strategic move is timely because financial consumers at the lower end of the market are opting for informal funding given the limitations in banking accessibility and lack of credit history and documents which can serve as proof for cash flow leaving them out of the financial-banking system giving rise to the rapid growth of digital finance. In 2009, only one in 10 adults with a mobile phone had ever used a formal loan from a bank, then came accelerated growth of digital credit from 2013, by 2017 over a third of Kenya’s adult mobile phone-owning population have used digital credit with 64 percent being active borrowers.

Lobby Group to Engage Government on Regulations

Digital lenders have formed a lobby group as the government moves to regulate the firms on concerns that some of the players were burdening borrowers with expensive debt. The Digital Lenders Association of Kenya (DLAK) chairman Robert Masinde indicates that the lobby which has a dozen members will engage the government on regulations and promote responsible borrowing as well as transparency among the players.

The move comes a year after the State published a draft Bill to regulate digital lending and protect Kenyans from crazy interest rates. A vibrant and diverse digital lending sector has successfully established itself in the country and thus this is the right time to give it a voice and promote global best standards.  The new association will enable digital lenders to speak with a common voice and promote best practices. The lenders who are part of the association include Tala, Alternative Circle, Stawika Capital, Zenka Finance, MyCredit, Okolea, LPesa, Kopacent, Four Kings Investment T/A Sotiwa, Kuwazo Capital, Mobile Financial Solutions and Finance Plan Ltd.

Digital Lenders charge between 18% and 200% on their loans

Digital lenders charge an annual interest rate of between 18 percent and 200 percent on their loans. A Financial Sector Deepening survey last year showed that digital lending is plagued by a lack of transparency with Kenyans paying fees they did not expect. Unlicensed and unregulated digital lenders have been put on notice as the government moves to protect consumers from fraudulent dealers. The Central Bank of Kenya (CBK) Governor Patrick Njoroge raised concerns over the increasing number of mobile loan apps that may be exploiting Kenyans. The banking watchdog boss has asked the public to be on the lookout to avoid being duped by unscrupulous operators who are exploiting consumers’ ignorance.

All financial services and products will soon have a label of approval by the Central Bank of Kenya to be able to guide users on which products to use the Governor has indicated. The governor has underlined the need for digital lenders to be guided by the interest rates caps introduced in 2016. Central Bank which is the body that regulates commercial banks and deposit-taking microfinance institutions will ensure that merchants don’t take advantage of Kenyans who are seeking quick loans.

Kenyans care about the interest rates burden from Digital Lenders

Many Kenyans from all walks of life have called for the regulation of mobile phone-based lenders on claims they are burdening borrowers with high-interest rates. Some Kenyans have accused financial institutions of offering mobile loans at rates above the cap provided in law and occasioning heavy borrowing and indebtedness mainly among the low-income groups on easy access to loans. They have given a good example of the Fuliza overdraft facility, a new M-Pesa service that allows customers to complete transactions when they have insufficient funds in their accounts. According to Kenyan M-Pesa users, the service has registered phenomenal growth since its launch, raking in Sh6.2 billion after just a month, Sh29 billion within three months, and Sh45 billion within six months of its launch. They argue that the growth has been achieved through circumventing the law and charging interest at rates as high as 10 percent in a month which translates to 120 percent in a year