Back up digital loan rules with literacy

 

Digital mobile apps and micro-lenders are at the forefront of expanding the Shylock economy. FILE PHOTO | NMG

By TONY WATIMA
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A Bill to regulate digital lenders is in the National Assembly after for debate. The proposed law backed by the Central Bank of Kenya (CBK) targets standalone digital lenders who are

not affiliated with banks and gives the regular powers to oversee their operations after a long period of self-regulation.

This means that these digital lenders will have to seek operating licences from the CBK in order to do business in Kenya.

The Bill grants the central bank powers to punish digital lenders who share personal data of loan defaulters by revoking their operating licences. Digital lenders always collect data like personal contacts and demand access to messages to check the history of mobile money transactions so as to credit score the borrower.

But some lenders have used this information to recover their loans through crude means like debt-shaming by calling friends and family and putting pressure on them to ask the borrower to repay the loans.

This misuse and abuse of data is covered under the Data Protection Act, which requires that data collectors and processors protect the privacy and confidentiality of the data they collect. So, this is an issue the Data Protection Commissioner should have handled.

The second issue is that the Bill gives the CBK powers to determine the pricing parameters to be followed by digital lenders when setting the cost of credit. There have been accusations that some digital lenders have charged borrowers high-interest rates to levels of up to 520 percent when annualised.

The concern here is the rollover cost when a borrower struggles with repayment and the fees have typically exceeded the cost of the original loan, which is perceived to be immoral.

So, the question is, will the CBK regulate the interest rates only? If this will be the case, then lenders will still continue levying heavy rollover fees to navigate this part of the regulation.

Third, digital lenders will be required to make full disclosure on the loans to borrowers in compliance with the Consumer Protection Act. Under the Consumer Protection Act, this provision should have been enforced but the problem was the lacuna in law where the digital lenders are not covered by any regulator.

The Bill seeks to cure this problem by bringing the digital lenders directly under CBK watch. Transparency on loan terms and conditions is very important because it helps the consumer to make informed decisions. The fact the digital lenders were not providing all the information about their loan product was wrong and needed to be addressed.

One other issue that the CBK will also have to address to tighten rogue lending practices such as predatory loans is consumer education. If the CBK wants to strengthen consumer protection around the digital lending spaces, there is a need for the regulator to educate consumers about the options to choose from.

The fact that there is a big demand for digital loans because they are collateral-free and have quick access points to the need to increase the level of financial literacy around digital loans.

Previously, it had been proposed that the CBK should use the “name-and-shame” approach in dealing with rogue digital lenders. But that will not be enough.

There is need to increase the level of financial literacy. For example, only a handful of consumers can calculate the loan interest on an annualised basis. So financial education should go hand in hand with the effort by the CBK to bring sanity to the digital lending space.

Lastly, it was the proposal of CBK to have capital requirements for digital lenders just like commercial banks. This proposal was edited out by the parliamentary Finance committee.

The committee was right to remove this provision because such prudential regulation regime is incompatible with the digital lenders’ model of operations. Unlike commercial banks which collect deposits and also collateralise their loans, these digital lenders issue collateral-free meaning they take all the risks in their business model.