The recent revelation that a person committed suicide following failure to repay back money borrowed from a digital and mobile micro-lending platform has brought to the fore the challenges of ease of access to credit from formal financial intermediaries and the many new avenues sprouting up which are but unregulated.
The advantages of a rapidly developing financial technology (fintech) market are that it allows for innovative ideas to be tried and tested in the market. In Kenya, since the advent of mobile and digital financial services, many new innovations are being spewed to the market almost on a daily basis. The fintech sector has been very vibrant.
A drive on almost all major roads one encounters countless micro lenders advertising their services on billboards and street light signs. From ‘get cash in less than 1 hour’ to ‘you need money? Just click on the app below’ has easily enticed many to simply click on their mobile handset and within no time their message ringtone confirms the incoming message is loaded with cash.
With most digital micro-lenders riding on the mobile money services of Safaricom Mpesa and Airtel Money, a person receives the money instantaneously. Almost all the micro-lenders, save for their names, are anonymous to the borrowers.
Traditionally, if one wanted to borrow from a financial institution, you would fill in a form; provide details about yourself, source of income, and next of kin among others. Of course, the basic “Know Your Customer (KYC)” requirement by the regulator was already in place. Most formal lenders would ensure their money is secured either by a salary or some assets.
However, with the advent of digital and mobile micro-lenders, the rules, while seen as cumbersome, old school and too intrusive, have been turned on their head. All a micro-lender requires is one to download their app and then simply provide a set of information.
For instance, they require you to state the reason for borrowing and provide the potential borrower with various options such as start business, buy stock, pay fees, medical expenses among others. How they verify this is another story. Once you fill in the required details they then proceed and send the money to your mobile phone through either Mpesa or Airtel Money.
The micro-lenders are simply riding on an urgent and growing need for credit facilities. When the government introduced the Interest Rate Cap in September 2016 with the intention of capping the interest financial institutions were to levy on borrowers, hence make borrowing more affordable, hardly did it expect such a noble goal to lead to the birth of something that it would not be able to control.
“In November last year, a lady came to the Central Bank to explain to us that her husband had committed suicide after getting involved with one of these mobile lenders,” Central Bank of Kenya Deputy Governor Sheila M’Mbijjewe said recently.
“The government is quite clear that we will change the laws to enable us to oversight of these lenders. They cannot continue the way they are currently operating. We have a lot of predatory lending out here, which we want to regulate to ensure they offer their services fairly and affordably,” she said.
Whereas the Interest Rate Cap law was abolished last year, the damage it had wrought on the general economy and at household levels will take time to clear up. With the intention to make credit available and affordable to the majority of businesses especially micro, small enterprises, the net effect was the reverse. Financial institutions literally and figuratively locked out individuals, small businesses that were viewed to be risky. Even established businesses had challenges accessing loans.
With the ensuing vacuum, other alternative solutions sprouted. Shylocks got a major boost and borrowers were flocking to them with whatever item that could guarantee them funds. Motor vehicles, land, homes, business stocks were all one required to get funds. And their interest rates were exorbitant. In a previous article, we indicted how the shylocks would charge as much as 30 percent per month.
With the rapid development in fintech, mobile micro-lenders jumped onto the bandwagon and started hawking their loans. As indicated above all one needs is to download their app. Fill in the details and voila, you have the money.
The distress of inability or delayed payment is now being exhibited through a very dubious way the micro-lenders are employing. While applying for the money, they request you allow them access to your contacts. On default, the micro-lenders simply tap your contact lists and start calling everyone indiscriminately and requesting them to inform you, the borrower, to pay back the loan. Sometimes, this is for as little as 500 shillings.
Recently, I was called by one of the micro-lender following default by one of my former employees. Seeing that we use to talk a lot, they decided to call me and asked to intervene. They did not even bother to find out what was my relationship with the person.
Even as CBK intends to address this new development, it’s imperative they go back to the drawing board and endeavour to address the root cause; why are Kenyans unable to borrow from formal financial institutions. That may be the best solutions the regulator will offer to the market.
Johnstone Ole Turana is the Principle Lead at QLand Communications Consultancy.