Kenya Insights

Tag: Digital lending in Kenya

  • Digital Lending in Kenya: Willingness vs. Capacity to Repay

    Digital Lending in Kenya: Willingness vs. Capacity to Repay

    In April 2021, a bill that proposed licensing digital lenders was passed by the Kenyan parliament and is now pending approval from the national assembly. Among other things, this bill would require all digital lenders to submit product pricing to the Central Bank of Kenya for approval before launching, a move that seeks to lower predatory interest rates. Further, non-performing loans would be capped at twice the amount of the initial loan defaulted, which means lenders won’t be able to perpetually increase the amount to be paid back through late-payment fees.

    Much has been written on the fintechs that have flooded the Kenyan market since 2016. FSD and CGAP published alarming evidence in 2018 showing that in addition to a saturated digital lending market, an increasing number of digital borrowers in Kenya became over-indebted, which furthered them into poverty traps. Digital lenders such as OKash and Branch reportedly publicly shamed debtors by texting their friends, family, and colleagues. Further, high-interest rates and non-transparent fees resulted in APR’s above 400 percent, making it more difficult for some low-income borrowers to repay. In some instances, repayment was possible, yet it meant sacrificing other payments like food, medicine, or school fees. And finally, millions of borrowers were reported to credit bureaus for loans smaller than $10.

    During the COVID crisis, the Kenyan Central Bank issued a number of measures to ease the debt burden on borrowers, such as forbiddingunregulated mobile-based and credit-only digital lenders from reporting any late borrowers to credit bureaus. Although this helped ease debt stress on consumers during the crisis, this drove many digital lenders out of the market as levels of default skyrocketed, leaving many Kenyan borrowers underserved. The entire loan market in Kenya shrank due to COVID-19; today, these platforms lend around 2 billion shillings a month, compared to 4 billion shillings in early 2020.

    The proposed bill by the Central Bank of Kenya unfortunately will not address the issue of making digital credit both safe and accessible. The bill focuses on product pricing only, and it doesn’t address the underlying challenge of digital lending platforms: a weak credit assessment model. Such a model extracts large amounts of data from the borrower’s phone and runs it through algorithms that approve or deny the loan. Many digital lenders mitigate the risk of a light-touch credit assessment with above-market APRs and hidden late payment fees, thus being able to generate profit and returns to their investors.

    The primary problem is digital lenders do not measure the capacity of someone to repay, but their willingness to repay, and these are drastically different concepts. Willingness refers to the genuine disposition of a person to pay back their loan. Capacity, on the other hand, refers to the person’s ability to generate enough money in the future to pay back the loan without having to forgo essential expenses.

    For example, I might score very well on a digital risk assessment. My geo-trace shows I go to work every day, my call log shows I call my mom regularly, and my browsing history shows I do not engage in sports bets. These measurements indicate I am a responsible citizen who complies with her duties, suggesting that I have a high willingness to repay a loan. However, I might have astronomical medical expenses that the digital lender is unable to detect. Or I might be sending significant remittances to my family. Both of these relate to my repayment capacity and are measures that digital lending apps tend to ignore in favor of automated decision-making based on more readily available data.

    By comparison, traditional banks run thorough credit risk assessments, sometimes so thorough that they are slow and expensive. These banks have credit committees and risk analysis departments that challenge relationship managers on the loan proposals they present. The result is that most people granted a loan have the means to pay it back. This method excludes the majority of the world’s population from the financial system, however, it also ensures that most people who are granted a consumer loan actually have the capacity to repay.

    So where do we draw the line? How do we expand access to credit to low-income people and informal workers and also protect them from default? How can we measure their capacity to repay in a cheap, digital, and rapid manner? Should we prohibit alternative, digital, phone-based metrics that only assess someone’s willingness to repay?

    A Possible Solution

    The answer could be a measure in between. One idea is that the Central Bank of Kenya could only grant a license to digital lenders that incorporate the borrower’s capacity to repay in their credit assessment algorithms. This means, finding a way to measure, prove and integrate the person’s real income and expenses. Another option could be asking lenders to integrate proxies for repayment capacity. For example, mobile money records could be matched with the borrower’s geolocation to determine where and why they are being paid and predict how stable his or her income is. Coupled with strong data protection measures, this and similar metrics could help curb the high default rate and loan-stacking among digital borrowers in Kenya without causing financial exclusion.

    Further, as suggested in a publication produced by CFI, the Central Bank of Kenya should withdraw a digital lender’s license upon surpassing a threshold percentage of non-performing loans as a share of the total loan portfolio. This would force the lenders to improve their algorithms and creatively design more capacity-measuring metrics. And finally, the CBK should explicitly require licensed digital lenders to cross-check an individual’s loan performance with each other before issuing further credit to prevent loan-stacking. Although the Digital Lenders Association of Kenya (DLAK) advocates for digital lenders to be able to receive and submit borrower information to credit bureaus, this practice has not addressed loan stacking in the past and only served to blacklist millions of borrowers for small amounts. Therefore, digital lenders should be allowed to view and report outstanding loans, yet with very limited power to blacklist a late borrower.

    Kenya cannot go back to the old bank-driven model which financially excluded most of the population, yet Kenyans cannot keep paying the price for the financial experimentation of tech startups. Digital credit should be responsible, affordable, and inclusive. With this new bill, the Central Bank of Kenya is getting closer to achieving it. However, the root cause of the problem is the evaluation algorithm and the business model that stems from it. Without addressing this, little will change for Kenyan borrowers.

  • Urgent Need To Cushion Kenyans From Rogue Digital Lenders

    Urgent Need To Cushion Kenyans From Rogue Digital Lenders

    The concept of money lending has been in existence for millennia. Since the commencement of trade, human beings have, on occasion, found themselves on economically unequal situations where one cannot always afford to pay for what they need. It is for this reason that in early civilisations, farmers would borrow seeds and repay with grain after their fields yielded a harvest. They would also borrow livestock on the promise that it would be returned upon the arrival of a new calf.

    Over time lending has become more sophisticated which led to the creation of banks which issue loans to borrowers at an interest. The growth of the banking sector necessitated heavy regulation to protect and guide the sectors’ players and to balance risks and opportunities in loan transactions.

    Modern day lending has moved away from the traditional mode where loans were mainly accessible through the banks to digital lending. In Kenya, mobile money services such as M-Pesa and Airtel Money have emerged to offer payment services as well as withdrawal, deposit and transfer of money to consumers through their mobile phones. According to the Communications Authority of Kenya, as of December 2019, mobile subscriptions stood at 53.2 million, with mobile money subscriptions standing at 31.2 million.

    Noting the opportunities available in the mobile phone sector, digital lenders have set up shop in Kenya in droves. They offer quick loans, usually processed within twenty-four hours (sometimes instantly) through mobile phone applications. Once approved, the loans are sent to the borrowers’ mobile money accounts.

    Digital lenders have seen a boom in their business with the chairman of the Digital Lenders Association of Kenya (DLAK) stating, in 2021, that digital lenders were issuing loans of up to Ksh. 4 billion per month before the Covid-19 pandemic. While they have since seen a reduction of this figure to approximately Ksh 2 billion per month, it remains a significantly profitable industry and this begs the question why the Kenyan Government has dragged its feet in the regulation of the sector. Digital lenders have taken advantage of the lack of regulation in Kenya and proceeded to run their businesses as they deem fit to the detriment of consumers.

    One practice that strengthens the calls for strong regulation is the interest and loan fees payable for such transactions. For instance, Tala charges interest rates of between 7% and 17% on any facilities issued to customers for a period of 30 days. OKash on its part charges an interest rate of up to 36% per annum. Branch, another popular digital lender in Kenya, charges interest rates of between 10% and 27% based on the facility amount and the repayment history by the borrower. In comparison, Kenyan banks’ average lending rate as at December 2020 was reported to be approximately 12% per annum.

    The above picture demonstrates that, unlike banks which are highly regulated by the Central Bank, digital lenders have the discretion to determine the interest rate charged to a borrower. In the event of default, some of the digital lenders impose late payment fees which are computed based on the outstanding amount and the duration it remains outstanding. Most consumers are not aware of this at the time of taking of the loan. In most cases, the consumer has an urgent need for cash and is oblivious of the amount repayable as interest or facility fees. It is only upon repayment that the financial burden on the consumer becomes apparent and most of them end up defaulting.

    Digital lenders are quick to remedy defaults to ensure they recover their funds. One of the ways they have adopted is by reporting the borrowers to Credit Reference Bureaus (CRBs) which in effect damages the credit reputation of the borrower. Digital lenders have been known to use CRBs to torment borrowers by listing them thus barring them from accessing credit with any other providers, including commercial banks. According to reports in 2020, CRB listing rose from 2.7 million in 2019 to 3.2 million in 2020 which was attributed to digital lenders. Even when the listing is erroneous or where the borrower makes a full repayment, most digital lenders have poor customer care support teams, and the delisting takes a significant amount of time to be effected. This in turn leads to decreased access to credit on the part of the consumer.

    Data protection has also come to the fore in the digital lending industry. Currently, if a consumer wishes to access a digital loan, they must accept the terms and conditions of use of the application. Some of these terms are unfamiliar to the ordinary consumer and most usually click “Accept” to access the services. In addition, the applications require the user to give certain consents on their mobile phone, including access to text messages and contacts. Initially, this seems harmless. However, in the event of default, consumers have come to realise the hard way that one must give to Caesar what belongs to Caesar. Some digital lenders are known to bombard their clients with messages demanding payment and threatening severe consequences for non-compliance. Some lenders are also known to reach out to third parties who, despite not being listed as guarantors, are requested to intervene and request the borrower to repay their facility. This is not only embarrassing to the borrower but also an invasion of the borrower’s right to privacy.

    In addition, through their access to contact details on a borrower’s phone, digital lenders are also known to target the borrower’s contacts and send them targeted marketing messages. Some of these messages contain clickbait content suggesting that a loan has been approved. This is notwithstanding the fact that the individual has neither an account nor applied for any loan from the provider. This constitutes not only an unethical behaviour but also a violation of data protection laws.

    There have been attempts to regulate the digital lending industry in the recent past. In 2016, the Competition Authority of Kenya directed financial services providers, including digital lenders, to provide details of all charges on their platforms to ensure that the consumer is aware of the charges. In 2018, Treasury published the Financial Markets Conduct Bill which would have regulated digital lenders. Unfortunately, the Bill has never been passed into law due to various contentions on its proposals. In 2020, the Central Bank of Kenya (Amendment) Bill was tabled in Parliament. The object of the Bill is to amend the CBK Act to ensure that CBK regulates the conduct of providers of digital financial products and services. The Bill is yet to be debated and passed by Parliament.

    At present the digital lending market remains unregulated and the persons who are adversely affected are the low-income groups who are easily taken advantage of by the digital lenders. There is need to rein in digital lenders under one regulator who can oversee the sector, license players and bring order to what is currently a chaotic industry where the law of the jungle reigns supreme.

    In the latest positive development, the Data Protection Commissioner Immaculate Kassait has revealed the investigations following complaints over digital lenders who have breached the confidentiality of personal information.

    The firms are accused of resorting to “debt shaming” tactics to recover loans.

    This includes use of debt collection agents pursuing borrowers either by informing their friends and family using contact information scraped from their phones or by threatening to tell their employers.

    The Data Protection Act bars sharing of data with third parties without consent and gives individuals the right to be told when their data is being shared and for what purposes.

    “The Office received complaints from data subjects regarding digital money lending applications. Towards this end, my office has commenced investigations on a total of 67 such complaints in line with the office mandate,” Ms Kassait said without divulging additional information.

    Scores of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans, where borrowers can get loans in minutes via their mobile phones.

    Borrowers share personal information, including their professions and monthly earnings, when registering with digital lenders.

    But besides the pursuit of unpaid loans, digital lenders share personal information with data analysing firms and for marketing.

    The Central Bank of Kenya (CBK) has previously raised concerns about the abuse of the personal data of borrowers and called on lawmakers to fast-track legislation to provide for the regulation of digital lenders.

    Lobbies that had petitioned Parliament during the review of the Bill also said that loan applications are private affairs that should be treated as confidential information.

    Digital lenders have saddled borrowers with high-interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and an ever-ballooning number of defaulters.

    The Data Protection Act further compels firms to disclose to individuals and customers the reasons for collecting their data and ensure that the confidential information is safe from infringement by unauthorised parties.

    Offences under the Data Protection Act attract a fine of up to Sh5 million and or imprisonment for a term not exceeding to 10 years or both.

    “Infringement of provisions of the Kenya Data Protection Act (DPA) will attract a penalty of not more than Sh5 million or, in the case of an undertaking, not more than 1 percent of its annual turnover of the preceding financial year, whichever is lower,” the Act says.

    “Individuals will be liable to a fine not exceeding three million shillings or to an imprisonment term not exceeding ten years, or to both.”

    Scores of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans, where borrowers can get loans in minutes via their mobile phones.

    The firms are accused of resorting to “debt shaming” tactics to recover loans.

    This includes use of debt collection agents pursuing borrowers either by informing their friends and family using contact information scraped from their phones or by threatening to tell their employers.

    The Data Protection Act bars sharing of data with third parties without consent and gives individuals the right to be told when their data is being shared and for what purposes.

    “The Office received complaints from data subjects regarding digital money lending applications. Towards this end, my office has commenced investigations on a total of 67 such complaints in line with the office mandate,” Ms Kassait said without divulging additional information.