Ceteris Paribus: Considerations as Kenya Regulates Digital Lending

THE last five years have seen many mobile loan applications launched on the African continent, tapping into the growing demand for fast loans.

However, these start-ups operate in what appears to be an unregulated setup and the Kenyan government is among the first to apply some degree of regulation to digital lending.

The recent Kenya Digital Credit Provider Regulation Act 2022 states that:

“A person shall not establish or carry on a digital credit business in Kenya or otherwise hold themselves out as carrying on a digital credit business in Kenya unless that person is approved by the Bank in accordance with these Regulations, or is a person whose digital credit business is regulated by any other written law….a person wishing to engage in digital credit business in Kenya must apply to the Bank for a license.

The coming into force of the regulations in the matrix aims to curb some of the downward developments that have accompanied the proliferation of digital lending platforms.

‘TechCrunch’ noted that the lack of regulation meant that customer privacy was never guaranteed, as digital lenders arbitrarily shared user data with third parties.

In addition, customers who defaulted on their loans faced constant reminder calls from debt collectors, who also used shameful tactics like calling friends and family to compel defaulters to pay.

Although lending apps offer collateral-free loans, they do come at a premium, with some annualized interest rates as high as 876%, which requires some degree of oversight from regulators.

A recent report from Markets and Markets indicates that the global digital lending market is expected to grow from US$10.7 billion in 2021 to US$20.5 billion by 2026, at a compound annual growth rate ( CAGR) of 13.8. % over the forecast period.

This represents huge growth opportunities for trade, not only globally but also for Africa.

The projection relies on the explosive adoption of smartphones and the growth of digitization, the growing need for an improved customer experience, greater visibility and options for borrowers and lenders, a growing demand for digital lending platforms among MSMEs and an increase in digital lending in response to the pandemic.

The rapid emergence of various financial entities such as fintechs, neo-banks and challenger banks along with the widespread adoption of mobile money across the continent have proven to be vital aids in bridging the inclusion gap. finance in the Third World, with resounding progress being made on the African continent.

The trend is expected to continue with many start-ups competing to serve Africa’s unbanked population (around 40%). Notably, venture capital funding for African start-ups in 2021 increased 2.5 times to $5 billion from the 2020 result, with fintech dominating the matrix, gobbling up 62% of the result, pointed out. Briter Bridges Africa Investment Report 2021.

Africa still relies on legacy telecommunications infrastructure unable to deliver low latency, high capacity connectivity with poor internet speeds often affecting customer experience.

Since all the services offered by digital lending platforms are online, the slowness of the connection leads to a drop in the quality of service.

The lack of high-speed internet has made it very difficult to implement digital lending solutions. Not to be outsmarted, organizations across the continent are relying more on offline lending options as part of service delivery.

Beijing cracked down on the P2P industry in 2018, suspending licensing for new lenders. More recently, it has also hampered local fintech players such as Ant Group, a dominant force in consumer lending on the continent.

While some degree of regulation may be necessary in digital lending, for Africa’s very underbanked population, the degree of regulation may need to be moderate to enable the growth of SMEs on the continent.

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