The Central Bank of Kenya-CBK has gazetted the Digital Credit Providers regulations, 2022 on Monday newspaper. The new regulations require all mobile phone lenders to apply for licenses from the banking regulator before September.
Digital lenders have six months to register with the CBK under new rules. The rules will prohibit the firms from sharing borrowers’ information with third parties. Additionally, the CBK will issue approval and regulate interest on their loans.
From September, the lenders will disclose all terms of their credit to borrowers, apply for approval of interest rates on their loans, and will be restricted from sharing information of loan defaulters with third parties.
Most digital lenders practice predatory lending. They use aggressive sale tactics to lure a borrower into a loan that is characterized by inconsiderate and abusive terms. They convince a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.
Their lending tactics often try to take advantage of a borrower’s lack of understanding about loans, terms or finances. They typically target minorities, the poor, the elderly and the less educated.
When registering with digital lenders, borrowers share personal information, including their professions and monthly earnings.
The lenders breach the confidentiality of information of borrowers who default on loans. They resort to sending messages to relatives and friends of defaulters which is debt-shaming tactics to recover the loans.
Debt collection agents have also been accused of harassing loan defaulters, threatening to tell their employers in an effort to force them to repay the loans.
“The Regulations are now operational, all previously unregulated DCPs are required to apply to CBK for a license within six months of the publication of the Regulations, i.e., by September 17, 2022, or cease operations,” CBK said on Monday.
Digital firms have taken advantage of the high demand for quick credit that does not require collateral, hence flooding the local market in recent years.
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Using a mobile phone only, loan application processes is easier and faster. It makes digital loans a quick fix for daily bills.
Signing of the Central Bank Act into Law
The signing of the Central Bank Act into law in Dec-2021 has led to the gazettement of the regulations. Digital lenders will be under the watch of the banking regulator for the first time.
CBK Governor Patrick Njoroge last week said that this industry has for years been blamed for predatory lending and debt-shaming borrowers in a bid to recover defaulted loans. He further said the regulations will bring sanity into the sector.
For the first time, the regulations will see digital lenders operate under similar regulations like micro-financiers and banks.