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PaydayNow: Regulating mobile loan apps in Kenya to curb unscrupulous lending

Kenya’s digital lending enterprises are about to be shaken up.

The country’s central bank is targeting predatory lending practices via new legislation. If permitted, digital lenders would need central bank authorization to raise rates or provide new products.

The decision comes amid rising concerns about predatory lending, given Kenya’s development of online, collateral-free loan businesses. Unlike conventional banks, which demand collateral and a lengthy application procedure, digital lending applications assess creditworthiness based on SMS, call records, bank balance notifications, and bill payment receipts. Middle-class and lower-income people who previously couldn’t get loans from conventional banks have taken to it unsurprisingly.

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But unrestrained expansion in digital financing has several drawbacks. 

Access to rapid digital loans seems to be increasing personal debt among users in Kenya. Digital lenders recouping debts from defaulters have been known to send messages to numbers on the borrower’s phone contact list, ranging from relatives to work colleagues.

Most importantly, digital financing is infamous for its usurious interest rates (up to 43%), unclear rules, and unreliable repayment schedules. On average, M-Shwari, Safaricom’s lending business, disbursed $2.1 billion in loans to Kenyans in mid-2018, mainly via the ubiquitous M-Pesa mobile money service.

Google said in August that lending applications that demand loan payback in two months or less would be banned from its app store, which is the leading distribution point for most apps. So digital lenders have to change their business strategies.

According to a January study by equities research firm Hindenburg Research, Android-based lending applications operated by Chinese internet giant Opera requested loan repayments within 30 days. The research also found users’ financial health descriptions and fundamental practices.

This is not the first effort by Kenyan authorities to regulate digital lenders. In November, the government established new data protection regulations to improve consumer data collection, storage, and exchange. In April, the central bank prohibited digital lenders from blacklisting customers owing less than $1,000 and reporting defaulters to credit bureaus.