Future and challenges of digital financing

Are digital lenders genuinely solving the issue of financial inclusion?


You no longer have to visit a brick and mortar bank to fill forms in order to access a credit facility. Through online portals or mobile apps, consumers can key in details like real names, monthly income, and identification number to get loans. Some digital lenders even validate potential borrowers based on their social media accounts. 

As if that is not enough, depending with your score and the app in question, a good credit history alone can qualify you for the facility in a matter of minutes. 

Probably, a majority of Kenyans are in love with mobile lending apps because of the easy nature of drawing funds from them straight to mobile money, mainly M-Pesa. But when after borrowing the quick loans you are left feeling that you made a mistake, what are the implications to borrowers? Are digital lenders genuinely solving the issue of financial inclusion? When will the regulator be serious about lending a hand to the tiny players who were once locked out of development loans due to lack of collaterals?

Sheila Mbijiwe, deputy governor of Central Bank of Kenya (CBK), protests the route that some digital lenders have taken saying that they are reversing the gains made in the recent years as far as having a stable and inclusive financial sector for economic development of a country is concerned. 

“Challenges are mostly structural rigidities,” she points out. “There is no justification by digital credit delivery platforms charging interest rates of above 300% per year. This is predatory lending, and it has to stop. They can’t continue the way they are operating.”

Ms Mbijiwe says that to survive and achieve transformation and economic growth, it is important to have sound financial systems that build and connect savings to investments. She argues that the perceived “self regulation” being used by a number of players in the digital space is doing more harm than good. Further, the fact that the bulk of digital lenders mainly use “terms and conditions” which are barely within the confines of the law calls for strict rules. 

Citing how a woman once visited their offices to complain that her husband had committed suicide thanks to a weekly mobile loan that was in default; the deputy governor says that it is time to outlaw certain digital lenders. Her point is; carrying on with digital lending platforms, which appear to be reaping off a majority of people will not steady the economy. If not checked, more and more individuals will end up on being listed on credit reference bureaus. 

Although boosting credit access today is an uphill task (partly because of people taking bad digital loans), what can help turn around the situation is implementation of credit infrastructure reforms. They include establishment of resilient credit reporting systems, collateral registries, legal structures and regulatory frameworks for fintech development and credit reporting mechanisms, insolvency and debt resolution frameworks, alternative credit scoring mechanism, among other things, will go along way. 

Ending this agony calls for what Mbijiwe calls “creating opportunities for scaling up financial inclusion” through ease of credit access. A movable collateral registry, for example, has been established to support the implementation of the Movable Property Security Rights Act, 2017. The Registry, she says, is set to improve access to credit for small-to-midsize enterprises that have been locked out of the formal credit market because of the informal nature of their records and lack of collateral for secured loans.

Deputy Governor CBK- Sheila Mbijiwe

This is backed by Credit Information Sharing Association of Kenya (popular as CIS Kenya), which is located at Kenya School of Monetary Studies on Mathare North road, off Thika road. As digital lenders numbers continue to rise, a more open and streamlined credit market will go a long way. 

Financial sector players say that following the issuance of the Kenyan Banking Sector Charter; that places the credit information sharing mechanism at the centre of efforts to improve loan pricing and transparency in Kenya’s credit market by CBK, the high interest rates that digital lenders charge makes no sense. 

According to Jared Getenga, CIS Kenya chief executive officer, to be a game changer in the credit market, risk based pricing, upholding of ethical culture while remaining customer centric are key factors that should not to be ignored. What will revitalise the credit market is harmonised credit scores. He is proud of the fact that now lenders are not confused about who they are engaging with thanks to data from credit bureaus. 

“Lenders are very confident that if you are borrowing from them, they can tell how much you have borrowed from other sources. And those who are credible are getting fast access to credit. That’s my pride,” says Getenga, adding that CIS was established to make credit-sharing work. 

People abreast with credit market say that with government also insisting on risk based pricing, once regulations are entrenched and the credit scores shared by various lenders are solid and more credit providers are sharing data with the credit bureaus, the next three years we are going to have a very efficient credit market. 

Having harmonised data, rules and regulations will also solve the issue of data protection thereby leading to reduction of fraud. The rich rogue digital lenders took advantage of the rate cap law that the Government introduced in 2016. It was scrapped at the end of 2019 in a bid to address consumer concerns in light of he high costs credit facilities which mainly affected the Small and medium-sized players.   

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