Have you ever received an SMS informing you that someone on your contact list borrowed money from a digital lender and failed to repay it? This can take the form of text messages or phone calls, and even if you don’t know the person on your ‘contact’ list, these lenders will find a way to incorporate you in the process.
Thankfully, the Kenyan government has taken steps to ensure that digital lending companies that disclose debtor’s personal information to third parties risk having their licenses revoked after lawmakers added a clause to the country’s new law requiring banking regulators to revoke permits from operators who violate customer secrecy.
About 100 mobile loan apps are available in Kenya, including Okash and Opesa, which are both owned by the Chinese-owned browser giant Opera and have been accused of adopting predatory lending techniques in the country. Okash and Opesa are two of dozens of lending applications that have been revealed to contain high-interest rates and exploitative terms, such as issuing 30-day loans rather than the 60-day loans required by Google Play Store standards. The interest rates on the two Chinese lending applications were excessive, reaching up to 876% annually, even though bank annual rates rarely exceed 20%. Other apps, such as Branch International Ltd., based in San Francisco, and Tala, funded by PayPal, were discovered to charge extortionate interest rates, with yearly interest rates of 156-348% and 84-152.4%, respectively.
Loan applications collect borrowers’ phone data, including contacts, and request access to messages to examine the history of mobile money transactions, for credit rating, as part of the registration process. Rogue lenders then utilize part of the information gathered to recover loans that have been disbursed when borrowers default. In a bid to push their clients to return their loans, digital lenders use debt-shaming tactics such as calling friends and family.
Kenyan authorities have taken several steps to protect citizens from rogue internet lenders who provide high-cost, no-collateral loans. After a time of self-regulation, it gives the Kenyan regulator, the Central Bank of Kenya, the authority to oversee the operations of freestanding digital lenders (not linked with banks). In the future, digital lenders would be needed to seek licenses to operate in Kenya, as opposed to the prior requirement of simply registering, which led to the proliferation of fraudulent apps.
“We are pleased that the space is now regulated, that we have access to the Central Bank (regulator), and that dispute resolution processes have been established.” But it’s price control that we’re concerned about, and we’re not happy about it – if you put an interest rate cap in place, no one would lend. We are concerned, but it is fair,” said Kevin Mutiso, chairman of the Kenyan Digital Lenders Association.
However, having regulations in place, according to Mutiso, will help the country’s lending space flourish as lenders engage with partners, including the regulator, to make it stronger. “Because of the lack of regulation, the market was unpredictable; now we know what we can and cannot do.” “We will also have better debt collection practices,” Mutiso added.
“We believe that the law will propel Kenya to the top of the global fintech market because everything is now clear – from what lenders and borrowers should anticipate. “We will also see improved products for our consumers, particularly MSMEs (micro and small-medium companies),” he added.
The Central Bank of Kenya Amendment 2021 bill also empowers the regulator to impose interest rate caps and suspend or revoke the licenses of digital lenders that violate “the criteria of the Data Protection Act or the Consumer Protection Act.”
Customers must be informed of the grounds for data collection under Kenya’s Data Protection Act. It also ensures that borrowers’ personal information is protected from illegal access. This comes as consumer advocacy groups accuse loan applications of selling client data to data and marketing firms. This is in accordance with the country’s Consumer Protection Act, which mandates that merchants disclose all terms and conditions related to the purchase of goods or services to consumers.
While digital credit is simple to obtain, its short term makes it costly, and the convenience of access has led to borrowers borrowing from several apps, leading to debt hardship and a drop in credit ratings, harming their capacity to obtain credit from banks in the future.
According to research conducted by the Kenya Bankers Association, comfort and simplicity of access are the most important factors that clients consider when deciding which platforms to use to obtain loans.
It was discovered that self-employed people prefer digital to traditional credit because of the liquidity changes they face in their area of work, similar to how loan apps are chosen during emergencies.
Exorbitant interest rates are not exclusive to Kenya; in India, lending apps have been found to charge weekly interest rates of up to 60%. In the south Asian country, there have been allegations of persons committing suicide as a result of harassment by loan-recovery agencies. Loan apps have proliferated in West African countries, with Nigeria being one of the largest markets in the area.
According to a report by the Consultative Group to Assist the Poor (CGAP), a research and advocacy organization, digital loan default and delinquency rates are high among Tanzania’s 20 million borrowers. The majority of borrowers used the loans for day-to-day expenses rather than for emergencies or investments, according to the research.
“Improving clarity on loan terms and conditions, making it simpler for customers to make educated decisions, is one of the most significant things regulators can do to reduce these numbers,” CGAP stated. The group advocated for stricter guidelines to control loan applications and for lenders to be more transparent about loan arrangements.
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