By Phyllis Kamau
Thanks to the strategic alignment to the global technological revolution, Kenya has one of the mosteffective Digital Lending access rates especially to micro-small medium enterprises and households at the bottom of economic pyramid.
The Digital Lending movement has forced commercial banks to join the frenzy with commercial banks like KCB, Equity Bank and Cooperative among others joining Safaricom to launch leading lending products.
According to Financial Deepening Sector (FSD, Kenya), the market has grown fast: M-Shwari having disbursed KES230 billion loans since inception in 2012 while KCB, the largest lender by asset size in Kenya, now provides 90 per cent of its loans through its KCB M-Pesa platform.
Equity Bank, the leading institution in terms of depositors had disbursed KES57 billion via the Equitel platform by March last year. Overall, the country now has at least 49 Digital Lending apps lending between KES50 to KES50, 000.
But there is a lacuna in the sense that despite the unprecedented growth of the platforms, digital credit isnot reaching everyone. It remains ill-suited for most of the population whose livelihoods are characterized by irregular cash-flows, such as farmers and casual workers. Reaching these segments will require a deeper understanding of their financial lives, the key risks that they face, and the day-to-day liquidity needs.
However, as Digital Lending grows in the country, there is no doubt that few unethical players will try tosteal the show to accumulate profits. Pyramid schemes posing as genuine mobile app lenders are on the rise, with some asking unsuspecting borrowers to pay registration fees and deposits before vanishing into thin air. They have neither registered physical address nor customer care help lines. They are heavily advertised on social media promising quick loans, unbelievable returns and packages.
The authorities including Central Bank of Kenya and Capital Markets Authority have expressed concern over the increasing number of unlicensed and unregulated financial products. Some of these products include online pyramid schemes, credit and saving schemes as well as mobile loan apps.
Unlike those operated by commercial banks, microfinance institutions and cooperative and credit societies, the digital informal lenders operate under their own rules.
There is also a growing concern about lack of a credit pricing model in the sector, exposing consumers to exploitation. While some digital apps are lending at reasonable interest rates, others entice clients with flashy offers laced with hidden charges that push interest rates to the extreme.
The Central Bank Governor recently voiced his concerns about lack of rules in the space and likened the digital lenders to Shylocks and blamed them for exploiting desperate Kenyan borrowers.
In May the same year, and for the first time, the National Treasury published a draft Bill on financial regulation which covers digital lenders. A key objective is to ensure that providers treat retail customers fairly.
But above this, there is also need for Digital Lending apps to go beyond business and show a sense of responsibility. Various studies show that access to credit alone is not enough. First-time customers need support from providers to understand the terms of these loans, as well as their benefits and consequences.
It is no wonder that the World Bank has described mobile money as a success field but equally a regulatory minefield. It warns that digital credit, if not properly regulated, can easily exacerbate poverty levels and lead borrowers into debt traps.
It is therefore upon the sector to come up with ways to analyze borrowing habits of its customers not only for profit maximizing purpose but only to avert indebtedness.
The FSD report echoes the need for responsible practices in Digital Lending space, calling on players or an oversight to develop better tools to track over-indebtedness and multiple borrowing.
It is imperative for the sector to develop effective self-regulatory policies to protect clients and safeguard its credibility. Self-regulation will help avert government forced interventions and effects of the Banking Act, 2016 that did not only affect operations in the banking sector but also crippled lending to the private sector, negatively affecting economic growth in the country.
Transparent and responsible digital lending practices will see Kenya lead the world in spearheading the Universal Financial Access 2020 initiative and leverage on it to realize Sustainable Development Goals.
Ms. Kamau is a Digital Lending Analyst