How 2021 Shaped the Digital Lending Space

Digital lenders had a busy 2021. Not only did their customer base continue to expand but the operational environment took a complete turn.  According to Reel Analytics, for every 100 Kenyans interviewed, 55 had taken out a digital loan in 2021, a clear case for the existence of this service and the exponential growth in the number of businesses and Apps offering loans.

Driven by a growing access to mobile phones, which grew to reach 59.2 million connections or a 109 per cent penetration rate according to Digital 2021: Kenya, digital lenders grew from strength to strength. According to the report, 73 percent of Kenyans aged 15 and above have a mobile money account, a key enabler of the digital lending space. 

Prior to 2021 the space had been largely unregulated because most mobile lenders were not deposit-taking establishments and therefore could not fall under governance by the Central Bank of Kenya (CBK). That simply meant that the lenders did not have to adhere to rules prescribed for the financial sector such as disclosure of financial statements or institute requirements for licensing. For instance, when the rate capping law was still in effect, digital lenders, whose emergence can be traced back to 2012, did not have to adhere to it. 

Central Bank Gets Power to Regulate Digital Lenders

As more Kenyans continued to take out digital loans, the need for regulation intensified. Digital lenders had increasingly resorted to reporting defaulters to credit reference bureaus (CRB) thereby blocking them from accessing other loans including from banks. Additionally, some lenders required that the borrower surrender access to messages and contact list, a breach of data protection laws. The lenders would resort to contacting third parties, even though not listed as guarantors, asking them to compel the defaulter to pay up the loan. This was not only embarrassing but a breach to the borrower’s Constitutional right to privacy. 

This breach in privacy is also in contravention with the Data Protection Act which prevails upon institutions to disclose to their clients why they are collecting their data. The Act protects borrower’s confidential information and broadcasting defaults to their contact list is in breach with this law. Additionally, consumer protection lobbies accused digital lenders of sharing customer information with data collection and marketing companies.

Central Bank of Kenya (Amendment) Act, 2021 was the answer to the challenges cropping up from the digital lending space. Its main reason for enactment was to provide licensing for digital lenders in the Kenyan market by including clause VIC, Regulation of Digital Lenders under the principal act. The law made it illegal for anyone to run a digital lending business before acquiring the necessary licensing from CBK.  

Following the Presidential Assent to the law, CBK was also given the powers to determine capital adequacy, set minimum liquidity requirements, approve business models, supervise, suspend or revoke licenses and make any other changes they deem necessary in the digital lending space. 

CAK Requiring all Lenders to Reveal Total Cost of Loans

To further tighten the regulatory environment for digital lender, Competition Authority of Kenya (CAK) moved to compel mobile digital lenders to disclose cost of loans to customers before disbursing money to their mobile wallets. This includes interest rates, late payment and roll over fees.

This is also in line with the Consumer Protection Act which prevails upon sellers of goods and services to fully communicate all the terms and conditions pertaining to purchases. 

This was geared towards increasing transparency in the digital lending space with the regulator saying that Kenyans received these loans blindly without understanding their rights and reading through the requirements. 

According to a study by CAK, only 27 percent of borrowers knew the cost of loans before taking them up. The move mimics the requirement that mobile money operators disclose changes attached to transactions including sending funds.  

Misuse of CRBs Nipped in Bud

Additionally, CBK barred digital lenders from blacklisting defaulters of up to Sh1,000 with CRBs. CBK’s draft Digital Credit Providers Regulation, 2021, also requires that the lenders seek consent from borrowers before listing them with CRBs. 

According to CBK, at the time of instituting the regulation, there were 378 million records listed with CRBs with 42 million people being blacklisted from accessing credit. Of these, 13 million defaulted on loans that were less than Sh1,000. 

The regulations also bar digital lenders from varying interest fees on amounts borrowed. The CBK wants to cap the amount of money that can be deducted from a defaulting customer, thereby protecting borrowers from punitive charges that had made it impossible for them to repay their loans.

Branch Buys Century MFB

The Competition Authority (CAK) approved an 84.89 per cent acquisition of Century Microfinance Bank (MFB) by Branch International Ltd. 

Branch offers loans to first time borrowers who do not have an existing bank account across Africa, India and Mexico while Century MFB empowered micro, small and medium businesses with diverse financial services. Branch, a Silicon Valley start-up and Central Bank of Kenya- licenced Century would retain their loans and credit contracts entered into with their clients until their expiry, according to the CAK Gazette Notice. 

Wakanda Acquires Choice MFB

Wakanda Network bought an 85 per cent stake in Choice MFB in October 22, 2021 following approval by CBK the previous month and a nod from the Treasury Cabinet secretary in October in line with the Microfinance Act. 

Owned by Chinese entrepreneur Robin Duan Wei, Wakanda was incorporated in the United Kingdom in February 2020 while Choice was given an operational licence by CBK in May 2015. 

The acquisition was in line with Choice MFB’s plan to strengthen the microfinance banking sector. 

What Does 2022 Hold for the Digital Lending Space?

This year will see CBK publish regulations governing mobile loan issuers by March 23. This will be exactly three months after the draft regulations were shared with the public for consideration and comments. 

Any digital lender that fails to adhere to the regulations will lose their licence, land in jail, pay a fine or incur any two of these. 

The Digital Lenders Association of Kenya (DLAK) has, however, faulted CBK for instituting a minimum capital requirement similar to commercial lenders yet they are non-deposit taking lenders. DLAK would like to see a credit-only lenders regulation similar to Uganda’s Money Lenders Regulations of 2018.

Digital lenders could also continue biting into MFBs profits forcing some to sell or close shop altogether as more borrowers look into short-term mobile loans for business and personal use. 

MFBs reported massive losses in 2020 due to Covid-19 but also the pressure exerted on them by Savings and Credit Cooperative Societies (Saccos) and digital lenders. 

During the year, 14 MFBs reported a 561 per cent growth in losses which hit the 2.2 billion mark in 2020 up from Ksh339 million the previous year. 

This shaky MFB environment could be pointing to more acquisitions in the coming year.