How CBK Regulation Affects Borrowers of Digital Loans

EDITOR'S NOTE: This article is a part of our Money254 Partner Series and is produced in partnership with Zenka Digital Kenya. For more on Money254’s editorial policy, read here.

If you have ever taken a digital loan, you have first-hand experience on how life-saving this typically quick loan approval process can be - especially when you need money urgently. 

But you will also be familiar with some not-so-great practices by some lenders that may have completely put you off digital loans.

Some of these practices include exorbitantly high interest rates, nondisclosure of total cost of credit before disbursement, harassment during collection, misuse of personal data and debt shaming.

But this is now set to be a thing of the past following the enactment of the Central Bank of Kenya (Amendment) Act 2021 that paved the way for the oversight and supervision of all Digital Credit Providers (DCPs). 

In this article, we take you through the changes taking place in the digital lending scene now, under CBK supervision and how they benefit you.

Timeline of Events

December 7, 2021: President Uhuru Kenyatta signs into law the Central Bank of Kenya (Amendment) Act 2021.

March 18, 2022: CBK gazettes the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022, issued under the Central Bank of Kenya (Amendment) Act, 2021. 

September 17, 2022: The six-month grace period for all digital lenders to apply for a licence with the CBK lapses. CBK announces it has received 288 applications. Only 10 are approved. Others at various stages. Those that missed the deadline directed to cease operations forthwith. 

January 30, 2023: 12 more digital lenders are licensed. CBK announces total applications for licences have risen to 381. A total of 359 applications are still pending. 

“Other applicants are at different stages in the process, largely awaiting the submission of requisite documentation. We urge these applicants to submit the pending documentation expeditiously to enable completion of the review of their applications,” the CBK stated in a January statement.

Digital Credit Providers (DCPs) whose applications are still being processed will continue operating until a decision is made on their applications.

This explains why some of the most popular digital lenders such as Zenka Digital - who tells Money254 it was among the first lenders to submit all required documents to aid the CBK's licensing review process - are operating completely legally.

“As one of the longest-running lending apps, a co-founder and member of the Digital Lenders Association of Kenya (DLAK) -now DFSA-K, Zenka has strongly supported the implementation and complied with the highest ethical standards in the industry since the very beginning of its operations in Kenya.

“Due to the rapidly increasing number of mobile lending apps in the country (with an emphasis on fake ones), the call for regulation has become even more urgent,” says Zenka Digital country manager Duncun Motanya. 

What the Digital Loans Regulations Say

The CBK has severally stated that the need to licence and oversight digital lenders is necessitated by concerns surrounding “the predatory practices of the unregulated DCPs, and in particular, their high cost, unethical debt collection practices, and the abuse of personal information.”

In this section, we will go through the DCP Regulations, specifically, on how they address these key issues raised by the public - which matter most to you.

Predatory Practices

The law prevents digital lenders from taking deposits in any form in the course of carrying out digital credit business. This includes the taking of cash collateral as security for loans. It also means a digital lender cannot ask you for a “registration”, “membership” or “application” fee before you can access a digital loan.

While submitting an application to be considered for a DCP licence, a digital lender is required to furnish the CBK with terms and conditions of its credit products and services as well as the pricing model and associated parameters. These, among other factors, will determine whether an application for a licence will be allowed or not. 

Under the regulations, a digital lender is only allowed to offer credit to a customer they have determined has the ability to repay - which is, in part, a characteristic of predatory lending. 

“A digital credit provider shall not advance digital credit to a customer unless it has first  taken reasonable steps to satisfy itself on the customer’s ability to repay the credit facility.” 

Confidentiality & CRB Listing

Under the law, a digital lender is prevented from sharing customer information with any person without the customer’s consent. 

However, the law allows digital lenders to disclose any positive or negative information about you to a Credit Reference Bureau (CRB) when such information is reasonably required for the functions of the digital lenders or CRBs.  

But a digital lender cannot give a CRB any negative information about you for amounts in default that do not exceed Ksh1,000.

Digital lenders are also required to ensure that any credit information about a customer that is shared with a CRB is complete and accurate. 

The law also requires a digital lender to obtain consent - oral, print or electronic - from the customer before sharing their credit information with the CRB. 

Before you can be listed on the CRB, a digital lender must give you a 30-day notice (or shorter depending on the loan contract) in writing or through electronic means of the intention to list you. 

Within 30 days of listing you with a CRB, a digital lender is required by the regulations to notify you of the same. 

Transparency & Full Disclosure of Digital Loan Terms

To tackle the issue of customers being unaware of the total cost of the digital credit they are taking - which has been associated with high likelihood of default - the regulations require digital lenders to disclose the following to the borrower.

1. Charges and fees and the circumstances under which they may be imposed;  
2. Interest rate to be charged and whether on a reducing balance or not. 
3. Total cost of credit which shall include the principal amount, interest, fees and charges
4. The date on which the amount of credit and all interest, charges or fees are due and payable; 
5. and customer complaint handling procedures. 

This disclosure must be made to the borrower before they are issued with the loan.

“The terms and conditions provided by a digital credit provider shall highlight to a consumer the fees, charges, penalties, relevant interest rates and any other consumer liabilities or obligations in the use of the financial product or service,” the regulations read in part. 

Digital lenders are also required by the law to explain to the borrower how any liabilities may be calculated and when they will accrue. 

Limit on Interest Recoverable From Defaulted Loans  

If you default on a loan, the law puts a limit to the amount of interest you are liable to pay if it is considered to be a non-performing loan - typically a loan is considred non-preforming" after 180 days of default.

The maximum amount a digital lender can recover from you is the sum of the following:- 

1. The principal you owe when the loan becomes non-performing;
2. Interest, in accordance with the contract between you and the lender. But this should not exceed the principal you owe when the loan becomes non-performing;
   
   i.e. you cannot pay an interest amount that is higher than the money you borrowed or the portion of the money you borrowed that you had not repaid by the time the loan became non-performing;
   
   
3. and expenses incurred in the recovery of amounts owed by the customer.  

However, if a court of law imposes interest on any amount you owe, then the regulations allow this to accrue.

“A digital credit provider shall not recover through a court of law any interest which is affected by the requirements of this regulation,” the regulations further state. 

Ethical Credit Collection 

The new regulations protect borrowers from unethical debt collection practices by prohibiting a digital lender’s officers, employees or agents from engaging in the following in the course of debt collection:- 

1. Use of threat, or violence or other criminal means to physically harm the person, or his reputation or property; 
2. Use of obscene or profane language; 
3. Unauthorised or unsolicited calls or messages to a customer’s contacts; 
4. Improper or unconscionable debt collection tactic, method or conduct.  
5. Any other conduct whose consequence is to harass, oppress, or abuse any person in connection with the collection of a debt. 

Consumer Protection

To protect consumers from exploitation, digital lenders are required to generate and issue receipt or acknowledgement of transactions carried out by or with a customer. 

They are also required to establish a complaints redress mechanism, including a channel for communicating customer complaints, and ensure proper communication of this mechanism to its customers.         

All complaints have to be addressed within 30 days of being lodged and the respective digital lender is required to keep a record of the complaint and the outcome of its resolution. 

Perhaps in cognisance of the inability of many borrowers to understand legal jargon or peruse through several pages of terms and conditions, all digital lenders are required to provide, in a summarised form, all benefits, prices, risks and terms of the product/service.

This information must be fair, clear, transparent, updated, current and easily available to its customers. 

Change of Loan Terms

Can a digital lender change the terms and conditions of a loan that has already been disbursed to you? 

The regulations state that a digital lender cannot increase charges or limits “or have a provision in the credit agreement that purports to vary credit terms” without the customer’s consent. 
‍
“A digital credit provider shall not change its pricing model or parameters without the prior written approval of the Bank [Central Bank of Kenya],” the regulations further read. 

The Long Wait

Since the deadline to apply for a DCP licence for existing digital credit providers lapsed on September 17, 2022, the CBK has only completed the process of licensing only 22 out of a total of 381 applicants.

This is a process that has taken four months so far. As such, given that there are another 359 applications that are pending, it is likely that this process may take a while before all digital lenders that meet all the requirements are issued with a licence.

If you have a pending loan with a digital lender that is not among the 22 that have so far been licensed, you may be tempted to speculate that you can get away with not repaying this loan as you await the results. 

However tempting that idea might be, it is important to know that all the digital lenders that have submitted their applications for licensing with the CBK are operating legally in Kenya and the loan contracts you may have with any of them are valid and recovery measures stipulated are enforceable.

Over and above the legal implications of default, you may want to consider the effects of defaulting on a loan to your credit history. As Zenka, a founding member of the Digital Lenders Association of Kenya tells us, repaying a loan on time and in full has numerous benefits.

“There is no doubt that repaying loans on time brings long-term benefits. Not only does it improve your credit limit, it also makes you appear to be more reliable to lenders in general.

“Loan defaulters are deemed unreliable and, in the aftermath, are unlikely to receive loans from legitimate market players. Therefore, we strongly recommend repaying on time and contacting the lender if you are going through a difficult financial phase,” says Zenka Digital country manager Duncun Motanya.

“Legitimate companies following proper lending standards will support their customers at their time of need and devise a satisfactory solution for both parties. This is why regulation is a must,” he adds.