Instant loans to be a thing of the past as Kenya moves to end fintech-fuelled lending craze

This week, the finance ministry published a draft bill on financial regulation which covers digital lenders, signaling for the first time the government intends to regulate fintech-fuelled lending craze.
Thanks to its tech savvy population, a liberal financial market coupled with a large pool of Kenyan youths hungry for capital, financial lenders have found set base in the country to extend credit to the banked and unbanked alike.
In the last three years for instance, 2.7 million people out of a population of around 45 million have been negatively listed on Kenya's Credit Reference Bureaux.

It will longer take a few minutes and a few taps on their phone for the Kenyan population to access instant loans as has been the norm.

This week, the finance ministry published a draft bill on financial regulation which covers digital lenders, signaling for the first time the government intends to regulate fintech-fuelled lending craze and protect the population from unchecked lending.

“We have a lot of predatory lending out here, which we want to regulate,” Geoffrey Mwau, director general of budget, fiscal and economic affairs at the treasury, told reporters on Thursday.

Thanks to its tech savvy population, a liberal financial market coupled with a large pool of Kenyan youths hungry for capital, financial lenders have found set base in the country to extend credit to the banked and unbanked alike.

From having had little or no access to credit, many Kenyans now find they can get loans in minutes and unknowingly in the process find themselves saddled with loans charged with high interest rates and increasing chances of default.

“I’ve realised having too many loans is a problem,” George Ombelli, a 38-year-old salesman working for a company importing bicycles and also owns a hair salon and cosmetics shop with his wife, says after borrowing simultaneously from four providers over the past year.

Citing a slowdown in business due to elections-related political turmoil last year, Ombelli says he has since fallen behind on some of his payments and now risks being reported to one of Kenya’s three credit bureaux, jeopardising his chances of being able to borrow more to grow his business.

He is not alone though, In the last three years for instance, 2.7 million people out of a population of around 45 million have been negatively listed on Kenya's Credit Reference Bureaux, according to a study by Microsave, a consultancy which advises lenders on sustainable financial services.

For 400,000 of them, it was for an amount less than two dollars.

Clients who ordinary won’t have qualified for a loan at a bank because of their high risk nature of defaulting either because they lack jobs or means of paying back, suddenly have tens of fintech firms at a touch of a button more than willing to offer them quick loans sometimes by simply running a background search on their Facebook page to determine their credit worthiness but the loan comes with a catch, the loan comes with an high interest rates way above what traditional banks offer.

Market leader M-Shwari, Kenya's first savings and loans product introduced by Safaricom and Commercial Bank of Africa in 2012, charges a "facilitation fee" of 7.5 percent on credit regardless of its duration.

Tala, a Kenyan credit lender says it has granted more than 6 million loans worth more than $300 million, mainly in Kenya, since it launched in Kenya in 2014.

Branch, another lender based in San Francisco, Nairobi, Lagos and Mumbai says it expects to grant about 10 million loans worth a total of $250 million this year in Kenya and its other markets, Nigeria and Tanzania.

However, some of the fintech lenders expanding into African countries, Latin America and Asia, argue that they are not to blame and their aim is to help some of the billions of people who lack bank accounts, assets or formal employment climb the economic ladder.

Tala and Branch say that their technology, which relies on an algorithm that builds a financial profile of customers, minimizes the risk of default.

They add that they strive to play a helpful role in planning for tighter regulation.

"We believe that credit bubbles and over-indebtedness will be a challenge over the next decade. (Credit Reference) Bureaus and regulation will be a big part of the solution," said Erin Renzas, a Branch spokeswoman.

Whether or not they mean well or simply out to make a profit on some of the poorest and gullible members of the society is debatable, what is the truth though is it won’t be business as usual anymore in Kenya.

The new draft bill seeks to arrest this craze and recommends digital lenders to be bound by any interest rate caps the Authority sets and also licensed by a new Financial Markets Conduct Authority.

However, it is not clear if digital lenders are subject to such caps and the current government cap on banks' interest rates is under review after two years of negative impact on the economy.

Introduced in 2016 to stop banks charging high interest rates, the current status of the sector, outside the direct remit of the central bank, allows providers, both banks and others, to skirt a government cap on interest of four points above the central bank's benchmark interest rate, which now stands at 9.5 percent.