CDH Kenya discusses pros and cons of regulating digital lenders
Digital Lending And Providing Now Regulated In Kenya. On 18 March 2022, the Central Bank of Kenya ("CBK") published regulations giving itself power to regulate and provide oversight to digital lenders.
By Steve Umidha
The advent of technology and innovation has given birth to mobile lending and other digital payment channels over the last decade, albeit at a cost.
Public concerns over predatory practices by unregulated digital credit providers, as well as exorbitant costs, and unethical debt collection practices, coupled with abuse of personal information, have been rife over the years.
It is against this backdrop that President Uhuru Kenyatta assented to the Central Bank of Kenya (Amendment) Act, 2021 – the draft Digital Credit Providers Regulations last December which offers the country’s apex bank with the powers to license and oversight the previously unregulated digital credit providers.
Such a law according to the banking regulator, is meant to protect consumers, credit information sharing, as well as curb anti-money laundering and combating the financing of terrorism activities.
To understand if the country and particularly the sector is ready for such adjustment to the booming sector, the Financial Fortune Media Managing Editor Steve Umidha recently sat down with Sammy Ndolo – the Kenya Managing Partner at Cliffe Dekker Hofmeyr (CDH Kenya) to discuss the implication of such a move.
Que: Are we ready as a country for a regulated digital lending regime?
Ans: Yes, Kenya is ready for a regulated digital lending regime. There has been a significant growth of digital lending particularly through mobile phones with reports that there are more than one hundred digital lending platforms.
With this boom there have arisen concerns relating to predatory practices by such unregulated digital credit providers. According to the Central Bank of Kenya, these unwanted practices have included high costs of loans, unethical methods of debt collection and personal data misuse.
Que: What are the key wins of this ACT for digital lenders and Consumers?
Ans: The key win for consumers is that the conduct and business of digital lenders will be streamlined and based on law that is specific to them and this it is hoped will ensure that they operate within a framework of common rules that protect and promote the interests of consumers.
On the other hand, the digital lenders will operate from a clearer regulatory environment and those lenders that operated in the fringes and believed to be responsible for the worsts practices will either need to reform or be weeded out of the business.
Que: Already, the cost of digital loans is set to up on 20 percent tax slap, would you say this is among key downfalls of a regulated regime?
Ans: The regulation of digital lenders and the increase in lending costs due to new taxes are separate issues. The proposed introduction of the excise duty tax would have applied to those operating in the digital lending business even if there was no specific regulatory framework for conducting that business.
Que: With all indicators showing cost of digital loans could go up, meaning less people will take up credit and lenders will record low revenue collection. Should we expect some lenders to fold?
Ans: The excise duty (if it is approved) in the Finance Bill before parliament could result in high costs of digital loans and lower margins for lenders. This may adversely affect digital lenders but we do not anticipate that the main players will fold as a result although it remains what the impact will be.
Que: The regulations comes with a lot of controls on consumer protection- Do you think the law is overprotecting consumers?
Ans: Consumer protection is a delicate balancing act because the law must operate as a blanket to cover both knowledgeable and ignorant consumers in the same manner. Without adequate measures, there is risk that certain segments of the population may be exploited to their detriment and those that are more knowledgeable benefit more as a result from those protections.
To achieve the right balance, more must be done to educate consumers of their rights so that they are able to demand these from the lenders and also the Central Bank of Kenya will need to allocate the resources necessary to ensure that compliance with the regulations can be monitored and infractions dealt with.