Digital lenders need to embrace CBK regulation

The Central Bank of Kenya head office. FILE PHOTO | NMG

By BUSINESS DAILY
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Summary

• The debate on whether digital lenders should be regulated by the Central Bank of Kenya (CBK) is back in the news thanks to a private members Bill by nominated MP Gideon Keter.
• A contrasting view has, however, been that since digital lending apps do not take deposits, the lenders do not require a licence from the CBK unlike the traditional banking and microfinance institutions.

The debate on whether digital lenders should be regulated by the Central Bank of Kenya (CBK) is back in the news thanks to a private members Bill by nominated MP Gideon Keter.

The legislator, through the CBK (Amendment) Bill 2020, proposes that mobile lenders without operating licences be barred from business amid concerns of unethical practices such as overpricing of loans, illegal mining of customer private data and shaming of borrowers who default on payment.

A contrasting view has, however, been that since digital lending apps do not take deposits, the lenders do not require a licence from the CBK unlike the traditional banking and microfinance institutions.

While both sides of the argument are weighty, it is important to focus on the broader picture of safety and security of the billions of shiillings moved on such platforms. The digital lenders should be wary of the risk of issuing credit in an unregulated market with no formal cushion should borrowers go rogue and refuse to pay.

In fact, the digital lenders are already feeling the pain of unregulated lending ever since the CBK denied them access to the credit reference bureaus (CRBs) listings last year—forcing many of them to now limit lending to curb losses. Clearly, regulation is good for both the mobile lenders and their customers. A sober discussion should be initiated on how to find a middle ground that suits both sides.

Commercial banks and microfinance institutions can attest to the benefits of legally backed loaning schemes, especially in an environment where borrowers are pressed by hard economic times.

Besides the safety of loaned funds, it is prudent that all financial intermediaries are accountable for the transactions all the time. With the global threat of money-laundering rising, it would be risky not to have funds tracked under laws such as the Anti-Money Laundering Act.

In short, the digital lenders need to appreciate the fact that their operations cannot be divorced from the country’s general financial services system and therefore the CBK should have an oversight role over them.

The regulatory framework should, however, not hurt innovation.