A debate has been ranging over the move by the ministry of finance to draft a financial regulation bill that is set to re-evaluate the capping of the interest rate on loans in Kenya. With the Central Bank of Kenya (CBK), commercial banks and the Institute of Certified Public Accountants of Kenya (ICPAK) all weighing in on the issue. Nevertheless, that is just the tip of the iceberg, the bill also contains regulation for Kenya’s fintech sector, a sector that has been thriving of late despite spurring debate over predatory lending.
Under the new bill, lenders-including digital lenders-will be licensed by the Financial Markets Conduct Authority who will be in charge of setting caps for the creditors. However, the draft bill is not particular on whether digital lenders will be subject to capping as their traditional banking counterparts are.
Nearly a third of Kenya’s adult population, 6 million people are digital borrowers. That is according to The Digital Credit Revolution in Kenya report, released by Financial Sector Deepening Kenya (FSD). The Kenyan financial services market has grown to accommodate a combination of Fintech start-ups like Tala, Branch and innovations from banks including KCB-Mpesa, Eazzy App by Equity Bank, Timiza app by Barclays banks that have boosted access to credit.
Supported by an above average mobile penetration rate of 88 percent, Kenya has been a launching pad for digital lending apps. Just recently Tala raised sh6.5 billion to expand into Mexico, India and the Philippines; while fresh produce supplier Twiga Foods in partnership with IBM successfully piloted a mobile lending service in the country and are set it to expand it to other markets.
On the other hand, concern has been rising due to the proliferation of loan defaulting and multiple borrowing, as a result of the ease of the lending process. The Digital Credit Revolution in Kenya report revealed that up to 35 percent Kenya’s 6 million digital borrowers have tried borrowing from multiple lenders and that 14 percent of borrowers were juggling loans from multiple lenders at the time of the survey.
Many digital borrowers report dipping into their savings or reducing their daily consumption to cope with the loans, this, if not checked, can potentially lock users in a poverty cycle once they are blacklisted in the respective Credit Reference Bureaux.