Digital lending: A sound regulatory framework is in everyone’s interest


There is a significant number of people in Kenya living without a documented financial history. Without that documentation, it has been nearly impossible for banks and other traditional financial institutions to understand and provide credit to these people.

The advent of digital technologies like mobile money and the growing availability of alternative sources of data has enabled us to overcome the limitations of traditional finance to push the limits on financial inclusion.

Today, customers can choose to share their phone data with providers to apply for loans. Providers can then underwrite these borrowers, even if they’ve never borrowed formally before and have no formal financial records. These apps are providing much-needed liquidity to millions of previously underbanked, yet credit-worthy Kenyans.

A recent survey by the Consultative Group to Assist the Poor (CGAP) and FSD-Kenya found that more than a third of borrowers (37%) take digital loans for business purposes and that almost three quarters (75%) of borrowers have completed secondary education. The survey also found that only one in eight borrowers had defaulted on a loan.

To better understand the difference Tala makes in customer’s lives, we conducted a study on Tala’s impact in Kenya. The study found that Tala’s loans have been key in helping people smooth their income and expenses to create more financial stability. For example, 70% of entrepreneurs described using Tala to help keep their businesses running through periods of uncertain income. The study also revealed that many Tala customers used these loans to grow their income, with 15% of respondents describing business expansion as their primary reason for using Tala.

These survey findings help validate what we see every day: borrowers use these loans to grow financially by investing in their businesses and that they are successfully paying back their loans. It speaks to the potential of the rapidly growing digital lending industry to promote inclusive growth. Digital lenders recognize this potential, and some even have financial inclusion and social impact at the core of their business model.

However, as many digital lenders are using new technologies to provide groundbreaking financial access to their customers, we must assume the responsibility to provide these services fairly and ethically.

It is critical that digital lenders practice the highest standards of consumer data protection, customer service, and transparency while being able to innovate and expand access to more people through this evolving technology.

Encouragingly, many have already started to do so, while others have gone even further, providing education and creating more awareness about over-indebtedness among customers. Some also actively and voluntarily participate in data sharing with credit bureaus.

Responsible lenders recognize that consumer protection and data sharing are increasingly important, and are working together to promote high standards across the industry.

Despite the efforts of responsible lenders, challenges do remain. With the digital lending industry being one of the fastest growing segments within the financial sector in Kenya, new mobile services are launched regularly including products by traditional banks as well as rogue lenders. This can make it increasingly difficult for consumers to differentiate between ethical lenders that uphold best practices and unprincipled lenders.

Collaboration across industry stakeholders will be key in creating and enforcing high standards for digital lenders. A conversation already exists between customers and digital lenders, providing valuable feedback on how we can continue to improve our services. Regulators are the final piece of the puzzle, and for them to make informed choices for Kenyan consumers, they will benefit from gaining a deep understanding of digital lenders and how they operate.

To achieve this essential degree of collaboration, we encourage sustained dialogue between responsible digital lenders and stakeholders across sectors, including the Central Bank of Kenya, the Treasury, and the Communications Authority. We propose conducting that dialogue through a regularly scheduled working group, where we can engage issues like protecting consumers, establishing fair lending standards and encouraging healthy growth in our industry together.

Let’s work together to build a strong financial system that makes life easier for Kenyans.

Together, we can promote and enforce ethical lending practices. We can empower borrowers to make informed decisions by calling for clear disclosure and transparency in loan pricing and terms. We can combat over-indebtedness by requiring digital lenders to make informed lending decisions based on the debt capacity of the borrower. We can protect customer privacy by encouraging lenders to treat all customers with the utmost respect and dignity throughout the entire borrowing experience.

We know there are healthy ways to protect consumers without stifling industry growth, and we are excited to work with regulators to strike that balance.

Writer is Tala East Africa regional manager

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