Kenya is known for being a pioneer of financial inclusion with its early adoption of money systems that allows people to transfer cash and conduct money payments using their mobile phones, without a bank account.
Currently a growing number of lenders are using the very same technology to extend credit to the banked and unbaked population, burdening borrowers with astronomic interest rates and leaving regulators struggling to keep up.
The finance ministry has published a draft bill on financial regulation last week. This bill covers digital lenders for the first time. The bill is aimed at ensuring the fair treatment of retail customers by lenders.
“We have a lot of predatory lending out here, which we want to regulate,” Geoffrey Mwau, director general of budget, fiscal and economic affairs at the treasury, told reporters on Thursday.
Kenya is like a ‘test case’ for emerging lending platforms, as it was with mobile cash. Some of the companies involved, including American fintech startups, plans to expand in other frontline markets, which means Kenya’s regulation will be closely monitored.
From having little or no means to credit, most Kenyans can now get loans in minutes.
Several fintech lenders are expanding into other countries in Africa as well as in Latin America and Asia, claiming they want to help billions of people without bank accounts, assets and/or formal employment to be included in the economic ladder.
Tala, a Silicon Valley-backed U.S. fintech firm, claims it has granted over 6 millions amounting to more than US$ 300 million, since it launched in Kenya in 2014. The company is expanding its newer businesses in Tanzania, Mexico and the Philippines and is currently piloting in India.
Tala and other lending firms claim that their technology minimizes the risk of default. They also claim to cooperate in planning for a tighter regulation.
“We believe that credit bubbles and over-indebtedness will be a challenge over the next decade. [Credit Reference] Bureaus and regulation will be a big part of the solution,” said Erin Renzas, a spokeswoman for Branch, another U.S. based fintech firm.
Branch says it is looking to grant 10 million loans worth US$250 million this year in Kenya, Nigeria and Tanzania.
Currently, Kenya’s lending sector allows providers; both banks and others, to circumvent a government cap on interest of four points more the central bank’s standard interest rates, which currently stand at 9.5%.
M-Shwari, Kenya’s first savings and loans product introduced in 2012 by Safaricom and Commercial Bank of Africa (CBA), regardless of duration charges a 7.5% “facilitation fee” on credit.
For a month-long loan, this translates to a 90% annualized interest rate. The shortest period for loan repayment is one week. Safaricom could not be reached for a comment on this matter.
Alternatively Talan and Branch offer different rates depending on the repayment period
Their apps each offer a month’s loan with 15% interest, amounting to 180% interest in a year. Both companies claim rates noticeably drop as people are able to pay back successive loans.
The new draft bill states digital lenders will be registered by a new Financial Markets Conduct Authority and that creditors will be bound by any interest rate caps set by the Authority. However, it remains unclear as to whether digital lenders are subjected to such caps. The current government’s cap on bank interest rates remains under review.
However, according to the members of the parliament, the public has had enough of high interest rates and the draft remains vague on when the cap will be lifted. The finance ministry will create a final version of the bill in the coming weeks before submitting it to the parliament.
Without effective regulation, Kenya’s Fintech lending industry could undermine the gains of mobile payments, which according to a study published in 2016 in the Journal Science, lifted more than 200,000 Kenyans out of poverty.
According to Capital Markets Authority chief executive Peter Muthaura “lessons are being learned from South Africa,” where unbridled bank lending fuelled growth but led to the collapse of African Bank in 2014 and high levels of household debt.