Ceteris Paribus: Considerations as Kenya regulates digital lending


In the past five years, numerous mobile lending applications have been launched on the African continent, capitalizing on the increasing demand for quick loans.

However, these startups operate in a seemingly unregulated environment, and the Kenyan government is among the first to enforce some level of regulation for digital lending.

Kenya’s recent Digital Credit Providers Regulations Act of 2022 provides:

“An individual shall not set up or operate a digital lending business in Kenya or otherwise impersonate a digital lending business in Kenya unless such person is licensed by the bank under these Regulations or is an individual whose digital lending business is one regulated by another written law…. a person who wants to do digital lending business in Kenya needs to apply for a license from the bank.”

The inclusion of regulation in the matrix aims to curb some negative developments that have come with the proliferating digital lending platforms.

‘TechCrunch’ found that customer privacy was never guaranteed due to a lack of regulation as digital lenders arbitrarily leaked user data to third parties.

Additionally, customers who defaulted on loan repayments faced endless reminder calls from collection agencies, who also used shameful tactics such as calling friends and family to force defaulting customers to pay.

However, while the lending apps offer collateral-free loans, they have been pricey, with some annualized interest rates soaring as much as 876%, requiring a degree of oversight from regulators.

A recent report by Markets and Markets shows that the global digital lending market is expected to grow from $10.7 billion in 2021 to $20.5 billion in 2026 at a compound annual growth rate ( CAGR) of 13.8% during the forecast period.

This results in enormous growth opportunities for trade not only worldwide but also for Africa.

The forecast is based on the explosive adoption of smartphones and the growth of digitization, the growing need for enhanced customer experience, greater visibility and options for borrowers and lenders, growing demand for digital lending platforms among MSMEs, and a surge in digital lending in response to the pandemic.

The rapid emergence of various financial institutions such as fintechs, neo-banks and challenger banks, as well as the widespread adoption of mobile money across the continent, have proven to be important tools in bridging the financial inclusion gap in the third world, with on the sweeping progress has been made on the African continent.

The trend is likely to continue as many startups compete to serve Africa’s unbanked population (roughly 40%). Notably, venture capital funding for African startups in 2021 grew 2.5x from 2020’s outcome to $5 billion, with fintechs dominating the matrix and gobbling up 62% of the outcome, according to the report Briter Bridges’ Africa Investment Report 2021.

Africa still depends on an outdated telecoms infrastructure unable to provide low-latency, high-capacity connectivity, with poor internet speeds often hampering the customer experience.

Since all services offered by digital lending platforms are online, slow connection has resulted in reduced quality of service.

The lack of high-speed internet has made it very difficult to implement digital lending solutions. In order not to be outwitted, the organizations on the continent are increasingly relying on offline loan options in the course of providing services.

Beijing cracked down on the P2P industry in 2018, suspending licenses for new lenders. More recently, it has also left homegrown fintech players like Ant Group, a dominant force in mainland consumer lending, lagging behind.

While some level of regulation may be needed with digital lending, for Africa’s largely unbanked population, the level of regulation may need to be lenient to enable the growth of SMEs on the continent.

  • Mabunda is an Analyst and TV Presenter at Equity Axis, a leading financial research firm in Zimbabwe. — [email protected]


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