With the literal mushrooming of mobile loan apps in Kenya, was it any surprise when Google announced that it would not allow loan apps with certain terms and conditions to operate on its system? After all, various authorities in Kenya, including senators and even the Governor of Central Bank of Kenya had expressed worries over the lack of regulation in the sector, calling for some form of legislation through The National Assembly.
Mobile loan apps, for those, like me, who have never used them, are phone applications that allow you to borrow cash from a credit lending company, through your Mpesa account, or, more recently, your Airtel Money account. One must admit that sometimes one just needs money urgently, which was not budgeted for. At this point, bank and other credit lending facilities are out of the question, because of the amount of time needed to process a loan, together with other implications, such as getting guarantors and securities. Mobile loan apps come in and save the day in such events. Closely linked and often confused with these apps are peer-to-peer lending apps, such as Zidisha, which allow the borrower to borrow money directly from other individuals, as opposed to the app itself being the lender.
They mostly work in a similar fashion: one needs to download the app from whatever play store they have, depending on their phone’s operating system. They then need to register by providing quite a bit of personal data. One should then read through the terms and conditions, and then agree with them, although most of us skip to the latter part. After that, one is allowed to request for a loan.
The amounts depend on the app, with most of them ranging from Ksh 300 at the first time, to a maximum of one million Kenya shillings. One’s borrowing capacity goes up, depending on how fast they repay the loan. The apps make money by charging interest at rates they choose. Some also charge service fees of up to 16%. Some apps are more creative with this, by making the interest rate dependent on the repayment of weekly installments by the due date, such that repayment on time increases credit score and reduces interest charged. Speaking of installments, the time and nature of the apps varies, with some requiring one-time repayment in, say, three months, and others requiring the money to be paid back in installments with shorter time frames.
The rain started beating us when it was discovered that some of these apps simply steal from citizens. With no form of regulation, some apps could charge as high as 48% interest and demand repayment in, say, two weeks. Others would not inform the client of the interest rate charged, and instead just give a blanket figure to be repaid. And hence, Kenyans being Kenyans, defaulting in loan repayment became rampant.
Nowadays, before transferring money via Mpesa, it is a common thing to say, “Tuma kwa hii line ingine; hiyo iko na Fuliza” (“Send to this other line; that one has an unpaid Fuliza loan”). The result of this has been massive negative listing of citizens on the Credit Reference Bureau. Some loan app companies even take this a step further and contact your close friends and family, telling them to ask you to repay your loan. This brings in the issue of right to privacy and data protection infringement.
The proposed laws seek to curb this menace. The Financial Conducts Management Bill, tabled by Gideon Keter, proposes the licensing and regulation of digital lenders, who essentially fall neither under banking institutions nor micro-finance entities. It seeks to ensure that interest caps are put in place by the Financial Markets Conduct Authority, to prevent digital lending companies from exploiting poor customers. Central Bank of Kenya also proposed a Banking Charter, which also seeks to impose market driven interest rates.
It also makes requirements that, among other things, lenders to inform borrowers via text of the terms of the loan before approval; lenders implement risk-based credit scoring techniques in loan screening processes; and that lenders publish key information on their websites and apps, such as the terms and conditions for the various products they offer. They are also required to acknowledge customer complaints within 48 hours and resolve them within 7 days.
Another key requirement within this law is that these institutions submit a quarterly report on the progress of the implementation of these laws within 10 days, at the end of every quarter.
The effect of this to the money lending apps, is, first of all, increased transparency. The apps will be forced to become more transparent to both the consumer and the Central Bank of Kenya, under which the laws seek to place these institutions. They will have to disclose interest rates and transaction charges before issuing a loan.
This, in effect, will curb unfair competition from each other, because interest rates will be disclosed and capped by the Financial Markets Conduct Authority. It could thus be argued that profits accrued by some mobile credit institutions will be significantly reduced. It would also make them more credible, as there are people who are still skeptical about borrowing using mobile credit apps. Regulation by a renowned entity such as the Central Bank will build public trust, which will enhance their market.
However, the biggest beneficiary of this regulation will be the consumer. Benefits such as data protection, lower interest rates, increased privacy, etc, will greatly improve customer experience. Under data protection, for instance, close friends and relatives receiving calls and texts from money-lending apps will be a thing of the past. Although they may still be able to access the client’s mpesa transactions and probably even one’s call logs, it will be harder for them to misuse the data received. The capping of interest rates will also benefit the consumer, since it will now be impossible to get charged an interest rate of 48%. This will help reduce poverty, since one will not need to secure another loan to pay off the existing one.
Negative CRB listing will also be greatly reduced, as the CBK will ensure that it is a matter of last resort upon defaulting. The lists will also be updated frequently to reflect those that have been removed from the lists, something that was not common under the regime of non-regulation.
In conclusion, while over-regulation stifles growth, under-regulation makes growth die out even quicker. It is therefore a prudent thing to ensure that users of mobile loan apps are protected from those that may want to take advantage of them. It is therefore my opinion that the proposed bill should become law, because of the numerous benefits it brings to the table.
By Victory Wanjohi