Taming Digital Lenders in Kenya: Are We Close?

Dr Patrick Njoroge, CBK Governor Photo|The Standard

As app developers in Kenya, we do not just create loans apps. We care about the experience and welfare of the users. Like many Kenyans, we are concerned about the rates the digital lenders charge.

Kenyans have been complaining about instant loan apps for quite a while. However, a suicide case in 2019 caused a stir.

A man borrowed from a digital lender and defaulted on his loan. The lender resulted in what many have termed as “harassment.”

We told you how lenders ask for access to private data such as contacts or phone gallery. Here is the purpose. The lenders will contact everyone on your phonebook if they cannot recover funds from you.

Such was the predicament of this man who resulted in suicide. The lender started sending messages to his contacts, including his mother and grandmother.

What would you do if all your friends and family members start receiving messages about a loan you cannot pay?

Some have termed this as cyber shaming. The suicide provoked CBK to move to action.

Borrowers, on the other hand, started sharing their horrific stories of the means that digital lenders use to demand their loans.

The digital lenders’ side of the story

Every time Kenyans talk about interest rates on mobile loans, the digital lenders come out to defend their case.

Is this a case of misinformation? Do borrowers know how the process works?

In a recent interview on Citizen TV, the Digital Lenders’ Association spokesman, Kevin Mutiso explained how they end up with high interest rates.

Some will call it exorbitant but the lenders call it fair pricing.

Digital lenders in Kenya access funds from banks and other financiers. At the moment, the lenders in the Kenyan market cannot get funds from local banks.

The result has been borrowing money from venture capitalists from the US, China, Poland, and other countries.   

The lenders talk of a high cost of borrowing the funds. The capitalists charge between 18% and 22 % as an interest rate.

Think about it. Who pays for this interest rate? You! And every other Kenyan looking for a thousand or two from a loan app.

Remember we have not yet factored in other costs like developing a loan app, operational costs, taxes, and fixed costs. The lenders still have to make reasonable profits to stay in business above all costs.

When they add their price to the cost of borrowing, the instant loan becomes expensive.

Also Read: 10 Ways to Identify Fake Loan Apps in Kenya

Digital lenders also talk about the high risk of the business. With millions of Kenyans listed on CRB as defaulters, the lenders understand the risk in the market.

Loan apps lend to people that local banks will instantly turn away. When you hear or read that you can get a loan with a poor credit score, understand that you will pay a premium for that risk.

Again, not all digital lenders are predatory. Some are committed to helping small business owners grow their businesses.

Small business owners like mama mboga cannot wait for 30 to 45 days of a business cycle to buy new goods. They must go to the market almost every day to keep the business running.

Loan apps came in to cover this market segment.

Should the government regulate the market?

It is easy to shout and demand that the government steps in to regulate digital lenders. Borrowers would expect that interest rates would come down.

Digital lenders are open to government regulation. CBK can protect both lenders and borrowers by setting standards to govern their operations.

For instance, digital lenders should be required to be transparent about the price of their loan products. Honesty and ethical procedures in collecting funds from borrowers are equally important.

However, capping the interest rates would harm the market, as it is with any other market.

A loan is a commodity that is subject to demand and supply forces. At least the digital lenders view it that way.

From your basic economics class, you know that the price of any commodity goes up whenever the demand exceeds supply.

Unfortunately, this is the case in the Kenyan market for instant mobile loans.

We have a good example from the Kenyan government’s move to cap interest rates for local banks. The bank owners, in response, introduced digital lending platforms that operate as other private loan apps.

The interest rates are nearly the same. However, most local banks are ethical in their practices and are strict about controlling the risk of lending to defaulters.

The financial crisis of 2008-2009 is another perfect example of the long-term effects of government interference in a market.

The way forward

We clearly need order in the digital lending space.  The government through CBK should create rules and regulation for digital lenders in Kenya.

Whether we call it cyber shaming or harassment, dealing with defaulters must be ethical and fair. We do not need to lose another life because of a small loan.

While talking about lenders, we need to look at the real issues as Kenyans. What is pushing Kenyans to digital lenders?

Why are we willing to trade our private data for a loan of Ksh. 1,000?

Most people do not borrow for luxury but for basic needs. Unfortunately, the needs are recurrent and with no sustainable income, the inevitable happens.

Kenyans are desperate for an economic shift that will increase their real income to match the ever-increasing rate of inflation.

The income of the borrowers that loan apps target does not match with the cost of living, especially in the urban setting.

Hence, beyond asking the government for regulation, we need to demand systems and institutions that work for the citizens. Corruption is still a sad case in Kenya where people borrow to eat.

When the government fails to do its job well, the citizens suffer.

Finally, we need to make equal noise about savings as we do digital loans.

As app developers in Kenya, we have heard all manner of arguments and complaints about instant apps yet the demand for the same is still increasing.

However, noise about apps or platforms that help you save consistently is rare.

We need to cultivate the saving culture while we demand ethical and fair practices from lenders and accountability from the government.

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