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Time to professionalise digital lending.

A few days ago, a committee of the National Assembly recommended an audit on all unregulated mobile money lending platforms. This is meant to bring them under the ambit of applicable money lending regulations.

While this is welcome, there is need to first enact regulations to professionalise the industry and introduce acceptable market standards. With the rapid growth of the digital lending industry, it has become increasingly difficult for the consumer to differentiate between professional ethical credit-only digital lenders and rogue providers.

As a result, many unprincipled lenders have continued to thrive, taking advantage of the lacuna to exploit consumers through predatory lending, lack of transparency and unfair debt recovery practices. In their defences, the data being released by some credit reference bureaus on the default rate of creditors is not credible since current CRB guidelines are not suited for digital loans, which are small and short-term.

It is therefore paramount that consideration be made to license a CRB specifically for digital lenders.

With professionalisation and reduction of risks, the regulator can enforce risk-based lending where a borrower's degree reduces with better scoring. The regulator and stakeholders in digital lending must also invest in improving financial literacy so borrowers understand their obligation to repay loans and clear any negative reporting of bad debts.

According to a report by the Financial Sector Deepening on digital credit in Kenya, app-based players can harness use of mobile phones, identity-linked digital footprints, automated credit scoring, agent networks and credit information sharing to deliver digital loans quickly and at a large scale.

Due to high investment costs, together with the high risk of digital lending, the interest rates on digital loans are usually relatively higher than the industry average. However, with better credit information sharing, better financial literacy among borrowers and credible data, the risk-based lending mechanism would, in the long term correct the market and reduce the interest rates.

One of the ways the industry can be professionalised is through exploring self-regulation and regulatory measures. There may be need for CBK to introduce guidelines and licensing of credit-only digital lenders so the consumer is able to identify credible institutions.

Second, regulation must be balanced in the full recognition of the high risk faced by credit-only digital lenders. The high-risk nature, due to lack of collateral or face-to-face interaction with customers and the fact that small-scale holders are targeted, should be taken into consideration when drafting guidelines.

It would be imprudent, therefore, to introduce interest rate capping on credit-only digital lenders. Nevertheless, the legislation must be as tight as possible to ensure consumer protection, prudential guidelines, fair competition and ethical practices always.

Third regulations that will support better credit sharing data for digital lenders, data protection, open data and regulatory sandboxes to support innovation are the other measures that will continue to drive growth and investment in the industry.

Lastly, the industry has been buffeted by massive fraud through sim swaps and lack of better know-your-customer data. Industry players would feel more supported if more stringent measures are introduced to reduce the risk of fraud. The recommendations by the parliamentary committee are therefore more than timely.
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Publication:The Star (Nairobi, Kenya)
Date:Mar 27, 2019
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