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Why Central Bank Governor is uneasy about online lenders

Lewis Njoka @LewisNjoka

Central Bank of Kenya (CBK) Governor Patrick Njoroge is unsettled on how the mobile lending sector in the country is operating as most of the players are not regulated.

Speaking during the Afro-Asia Fintech Festival that closed at Kenya School of Monetary Studies in Nairobi yesterday,  Njoroge described some of the digital lenders as shylocks taking advantage of credit-hungry customers. He said some digital lenders were exploiting their customers’ ignorance by charging exorbitant interest and transaction fees.

Njoroge said it is unfair to allow mobile-based lenders to charge as much interest as they wish while banks are restricted by the cap rates.

To protect the public from exploitation from unscrupulous digital lenders, he said, all apps regulated by CBK will now carry a notification indicating so. Njoroge also raised concern that many mobile-based lenders do not disclose their pricing terms to borrowers and lack of proper dispute resolution mechanisms that could expose Kenyans to exploitation.

Despite the digital lenders constituting less than one per cent of the country’s financial system, the banking sector regulator said, they have the potential to cripple the entire sector if left unregulated.

“We are playing with matches and we are in a petrol station where the danger is significant. A match is not that large but it can light up a petrol station,” he reiterated. Njoroge said he was unsure of how well digital lenders secured customer data and was unaware if they had proper anti-money laundering policies in place. Money laundering is closely linked to financing crimes such as terrorism and drug trafficking.

Sufficient time

The banking regulator is also unhappy that close to three million mobile-based borrowers have been blacklisted on the Credit Reference Bureau (CRB) for low amounts, saying many borrowers could have settled their debts had they been given sufficient time.

Digital lenders are currently on an uneven playing field with standalone apps unregulated while those affiliated to banks are subject to capping laws. Central Bank is seeking to address this inequality by having all of them under a uniform regulation.

“There has to be a proper regulation, where similar products are regulated in a similar way so long as you are lending to customers or receiving deposits. If you have a banking function, it is not just about the name; you have to be regulated,” said Njoroge during post Monetary Policy Committee briefing in May.

Online lenders under the umbrella of the Digital Lenders Association admit that the industry has several challenges but say the best way to deal with them is self-regulation.

“Once, we have such a mechanism in place, those among us who are exploiting customers will automatically find themselves out of business,” said Robert Masinde, chairman of the organisation founded by 11 members.

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