Fresh regulations are often met with skepticism from startup founders, but digital lenders in Kenya largely seem to be upbeat about the new Digital Credit Providers law, saying it will bring order to the sector.
The chairman of the Digital Lenders Association of Kenya, Kevin Mutiso, sounded optimistic about the impending new regulatory environment, saying that it had already fostered investor confidence and will bolster growth in the sector.
“The regulations have encouraged investors to come into our market, and I’m already aware of five new big players that have come in because of the new regulatory field. We are looking forward to being regulated and having a fair playing field,” Mutiso told TechCrunch.
Mutiso added that the association’s 16 members — including the market-dominant Tala and Zenka — are awaiting the required licenses to be fully compliant.
The regulations, set to come into effect on September 18, give Kenya’s apex bank, the Central Bank of Kenya, the requisite authority to police digital mobile lenders that have flooded the local market in the last few years.
Many of these startups took advantage of existing policy gaps to charge exorbitant interests, infringe on customer privacy rights, implement predatory lending practices and employ archaic debt recovery techniques that have left behind a trail of terrified borrowers and, in one case, even a suicide.
The new law will require all online lenders to observe consumer privacy and data protection rights and anti-money laundering laws, in addition to acquiring operating licenses. Loan apps will also be required to reveal their pricing model and disclose all the terms and charges to customers in advance.
Hilda Moraa, the founder and CEO of Pezesha, a Kenyan startup that offers SME loans, said the new regulations are needed to rid the country of rogue operators and offer consumer protection.
“The regulations will sanitize the sector and ensure we have more responsible lenders. It touches on consumer protection, too, and so customer data and privacy rights will not be violated anymore,” said Moraa, adding that she had noticed a shift toward SME loans as investors shied away from high-risk consumer borrowers.
Loan apps collect borrowers’ phone data, including contacts and demand access to messages to check the history of mobile money transactions — for credit scoring and as loan conditions. However, rogue lenders use some of the collected contact information for recovery in cases of default. Reports indicate that many digital lenders resort to debt-shaming tactics, like calling friends and family, to compel their borrowers to repay the loans.
With the new law, these providers are expected to avoid the use of threats or debt-shaming actions, including the posting of personal information on online forums and unauthorized calls and messages to customers and their relations.
Ali Hussein, the chairman of the Association of Fintechs in Kenya, believes the new regulations will retire the players that can’t meet the threshold set by the Central Bank of Kenya.
He criticized the implementation of the law, however, saying Kenya’s financial services sector was already over-regulated, adding that existing laws could easily be used to remove bad players.
“We have to be careful with what we are regulating. We have to be careful not to throw the baby out with the bathwater,” Hussein said.
“The fact of the matter is that we have always had loan sharks, and some of the bad players in digital lending have evolved from loan sharking. I think we have the tools to be able to remove bad actors. Like the issue of data protection [which is covered in the Digital Credit Providers law] is most certainly a good thing, but this can be enforced using the Data Protection Act,” he said.
The genesis of mobile lending in Kenya can be traced back to 2012, when the country’s biggest telco, Safaricom, launched M-Shwari, a mobile-based savings and loans product that is still running with backing from the NCBA Bank, a local financial institution. Since then, Kenya has experienced a flurry of digital and micro-lending apps, especially over the last seven years, when several hundred have come up.
While lending apps are common in Kenya, their popularity among consumers is dwindling in favor of products like M-Shwari, which are backed by banks and telcos.
As consumer credit trends shift, Moraa expects growth in the number of digital lenders offering SMEs credit.
“We are beginning to see more B2B models like ours — more players are moving to SMEs lending,” she said.