Implications of Digital Lending Regulation in Kenya

On 23rd December 2021, the CBK Amendment Act 2021 empowered the Central Bank of Kenya to regulate, license, supervise and oversee operations of non-depositing taking digital credit providers (DCPs). Previously, operations from these players were unregulated and all they needed was a business permit. With over a hundred players in the market and their appealing nature of availing unsecured, instant and convenient lending, there arose concerns over their debt-shaming recovery tactics, exploitative harassing nature in debt-collection and crafty interest rate adjustments. In that light, the CBK regulations were issued in March 2022, prompting these credit providers to apply for licensing within the stipulated six-month period. This event saw the licensing of only 10 digital credit providers, out of the 288 applications received, signaling tough regulatory measures and standards set by the regulator.

The CBK Amendment Act 2021 states the scopes at which the digital credit providers are supposed to abide by. Compliancy levels in the licensing requirements, governance capacities, updated credit information, consumer protection standards, the anti-money laundering policies and the subsequent reporting standards are all crucial spheres that the CBK warrants the initiation of digital credit providers. Undoubtedly, digital credit providers offer convenience and reliant financing as they are easily accessible to the masses. The advances of a few regulations and the wide use of mobile money have warranted the growth of the digital lending space. It is a no brainer that this impact will both positively and negatively affect the performance of digital lenders from the onset.

Financial services are an important aspect of development in an economy. The finance sector’s role is to allocate financial resources towards activities that generate revenue in pursuing achievement of economic goals such as employment which consequently generates improved livelihood and decline in poverty levels. This is achieved through financial inclusion that ensures households can obtain financial services affordably and readily. Evidently, a higher percentage of wage earners in Kenya lie under the informal sector, relying mostly on informal channels to access financing. Whereas previously the digital credit providers could alter interest rates in their favor, it should bring a sigh of relief to the borrowers who are now aware that these rates will be regulated and monitored. Also, the digital credit providers will be required to tighten loopholes in database updates, positively affecting financial statements and ultimately the non-performance loans which stand to decline. In addition, the digital credit providers will also witness stringent efforts by the Central Bank of Kenya in the adoption of AML policies and efficient approved business models, ultimately leading to a healthier market participation.

While all this is true, compliance with regulation can be costly to the digital credit providers and consequently there stands the risk of them curtailing long-term financing operations, to secure their cash flow and liquidity levels. Evidently, some people have unfortunately lost their employment status with the deregulation of most of the credit providers who have ultimately had to close shop. Additionally, the government will witness a strain in financial inclusivity, seeing that more regulations and conditions are set to the digital credit providers who had previously enjoyed the freedom of business innovation and creativity, to develop new financial products. That being said, the inexorable cause of unemployment will lead to a complete reskill and reshape of acquired skills from the digital lending space. With an average inflation rate of about 6.6%, more borrowers would want to access financing either for consumption purposes or investment. Seeing the possibility of a lag in the digital credit space, it cannot be dismissed that shylocks may form, to bridge the demand and supply gap brought about by regulation of digital credit providers.

Futuristic Outlook

With the need for financing to cushion the evident rise in the cost of living, licensed digital credit providers should remain objective in their cause, in providing affordable and accessible credit to worthy borrowers. On the other hand, however, borrowers will need to rethink how to balance repayment and rescheduling of their borrowings, to avoid collection frustrations from the credit providers. The regulation move should be a wakeup call to digital credit providers, to embrace empathetic approaches in debt collection, and invest in customer-relationship tools and strategies. Overall, in this instance where this regulation is challenged by its pros and cons and the plausible cost of legalizing outweighing the economic benefits, the government should have first consulted with the consumers, producers and employees in the digital money lending space, to determine the feasibility of the current, questionable regulation. This would have balanced the interests of all parties involved, to avoid unnecessary moral hazards in the industry.

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