KENYA: CBK gets powers to control mobile loan rates

MPs have offered the Central Bank of Kenya (CBK) express powers to control lending rates of digital mobile lenders under a proposed law that will see the regulator control their products, management, and sharing of borrower information.

The parliamentary committee on Finance and National Planning approved the Central Bank Amendment Bill 2021 and added a clause that gives the CBK powers to price interest rates for digital loans.

Now, the key aim of the government-backed Central Bank of Kenya (Amendment) Bill, 2021, which seeks to empower the banking regulator to supervise digital lenders for the first time, is to curb the steep digital lending rates that have plunged many borrowers into a debt trap as well as predatory lending.

The Bill was initially silent on the lending rates, only stating that the digital lenders were to play under the same rules as commercial banks that seek the CBK’s nod for new products and pricing that includes loan charges.

The report of the committee is now before Parliament for debate and approval ahead of it becoming law.

“The committee has explicitly granted CBK powers to determine pricing parameters.

This will ensure that CBK does not necessarily set the lending rate but rather provide parameters within which digital credit providers shall set the cost of credit,” Kevin Mutiso, chairman of Digital Lenders Association of Kenya (DLAK) said.

Tens of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans.

Their proliferation has 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.

From having little or no access to credit, many Kenyans now find they can get loans in minutes via their mobile phones.

The CBK says borrowers tapping digital loans from unregulated lenders grew from 200,000 in 2016 to more than two million in 2019.

The Bill also comes amid complaints that digital lenders do not provide full information to borrowers on pricing, punishment for defaults and recovery of unpaid loans.

Digital lenders have been accused of abusing personal information collected from defaulters to bombard relatives and friends with messages regarding the default and asking third parties to enforce repayment.

The push to control the activities of digital lenders comes more than a year after Kenya removed the legal cap on commercial lending rates.

The cap, which was introduced in September 2016, slowed down private sector credit growth as commercial banks turned their backs on millions of low-income customers as well as small and medium-sized businesses deemed too risky to lend to.

The subsequent credit crunch triggered an appetite for digital loans, attracting unregulated microlenders in response to the growth in demand for quick loans.

Market leader M-Shwari, Kenya’s first mobile-based savings and loans product introduced by Safaricom and NCBA in 2012, charges a “facilitation fee” of 7.5 percent on credit regardless of its duration, pushing its annualised loan rate to 395 percent.

Tala and Branch, the other top players in the mobile digital lending market, offer annualised interest rates of 152.4 percent and 132 percent respectively.

In April, the CBK barred unregulated digital mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs).

The committee dropped the requirements for the banking regulator will be expected to determine minimum liquidity and capital adequacy requirements for digital credit providers akin to conditions set for operating a bank in Kenya.

The committee rejected the proposal on capital and liquidity, saying digital lenders do not take deposits and, therefore, pose no danger to public funds.

The CBK had earlier raised the alarm of the credit-only mobile lending institutions being easily used to launder illicit cash.

Money laundering, which involves transferring and disguising illegally obtained cash to make it look legitimate, is mostly used by criminals and the corrupt to clean their wealth.

The Bill demands that the firms disclose to the CBK the source of funds that the institutions are lending to curb money laundering and terrorism financing.