The central bank of Kenya is proposing new legislation to govern the interest rates charged on loans from digital lenders. Online lenders will need the green light from the central bank to roll out new offers or raise lending rates if the legislation is enacted, Quartz Africa reported.
Online loans have caused a number of complications in Kenya, with digital loans leading to increased personal debt for users in the country. It has also been reported that digital lenders use methods to trick people into paying off loans, such as emailing numbers in a debtor’s contact book.
Traditional financial institutions require borrowers to put up assets to secure their loans and follow a procedure that involves extensive documentation. In contrast, online loan apps offer quick loans and determine whether someone should receive a loan by looking at phone information such as bank balance messages and call records.
This type of service received a boost from middle class individuals and those with modest incomes, people who were generally not able to obtain credit from traditional financial institutions. It also became known for its very high interest brackets which could reach 43% per month.
In October, news surfaced that Kenya’s National Assembly was considering legislation that would force the country’s mobile lenders to face central bank oversight. Accordingly, they should state their interest rates, as well as transaction fees, before granting loans.
A member of the National Assembly said in an earlier report that young people are very sensitive to mobile loan companies, which are “too exploitative in their repayment terms by charging exorbitant interest rates”.
The legislation would require the central bank to regulate and license companies, and also require them to meet capital thresholds. In addition, the law would provide for controls for the financing of terrorism and money laundering.
At the time, it was noted that micro-lenders are increasingly common in the country.