The Central Bank of Kenya (CBK) Amendment Bill (2020): A reflection on the public discussion on unlocking regulation of digital lenders
Digital lending can be traced back to 2012 when mobile money service Mpesa, begun a savings and credit facility known as m- shwari. Following this, Kenya experienced an exponential growth of non-deposit taking lending apps which are estimated to be around 150 . As the culture of digital lending continues to grow in Kenya, large amounts of credit available that are not within State supervision has been brought to the governments attention. In 2020, the Central Bank of Kenya (CBK) acted by introducing a bar on unregulated digital lenders with predatory practices that have left many Kenyans in a debt trap. Hence, a lot of these platforms have lost access as the CBK stopped the listing of loan defaulters to the Credit Reference Bureau and the blacklisting of borrowers with loans under Kshs 1000 as of 1st April 2020.
The CBK (Amendment) Bill 2020 is a private members Bill introduced by Honorable Oroo Oyioka to address the regulation of digital lenders. Since digital lending apps do not take deposits, lender do not need a license unlike traditional banking and microfinance institutions. Therefore, digital lenders are not squarely oversighted, although parts of their business are regulated by laws such as the Anti-Money Laundering Act. Currently, the Central Bank of Kenya is the regulator.
Key questions identified
The discussion covered three broad areas: what impact does regulation have on digital lenders, borrowers and traditional lending institutions? Is regulation necessary? And how do we ensure that there is financial inclusion? These exploratory questions set the ground for dialogue where the panelists were asked the following targeted questions:
1. Digital lenders use social media and other personal data for credit scoring. Some lenders have misused personal data in enforcement of their debts, for instance reaching out to the borrower’s contacts in case of default. Who is to regulate this? Is it the CBK or the Communication Authority of Kenya? On this point, it was noted that according to the Finance Sector Deepening Kenya (FSD, around 2.7 million users are in default.
2. The current CBK Bill is not a government Bill but a private Bill. Therefore, are we opening ways for the CBK to regulate? Or should our focus be on self-regulation?
3. Does the increase in digital lending mean that traditional banking has failed to serve some segments of society? In which case, how can regulation foster growth of digital lending and not stifle innovation? Relatedly, are traditional banks fighting digital lenders?
4. Is there a restriction of digital lending to digital financial products under section 2(2)(A) of the CBK (Amendment) Bill 2020 ? Is this narrow thinking seeing as fintech is expanding to aspects such as mortgage, savings, asset financing and so on?
5. An emerging concern was whether digital lending achieves financial inclusion considering the information asymmetry between the lender and borrower. For example with the COVID-19 pandemic, loan limits were unilaterally taken away without any explanation to customers.What can we expect from digital lenders in future emergencies?
6. In addressing privacy by design and language, how are we loosening the language for an average Kenyan? One of the obligations of consent under data protection laws is to try and communicate implications of these apps. The challenge is that many users only look at whether they are eligible but fail to read the terms and conditions.
7. Lastly, are we getting ahead of ourselves as this was just an amendment bill that did not comprehensively regulate all aspects of digital finance?
Panelists responses on the raised questions
The three panelists conceded that regulation of digital lending is beneficial. They outlined the challenges requiring regulation. These range from opaqueness on the owners and financiers of digital lending apps to cross regulation by multiple regulators. Three interrelated aspects – communication, banking and lending as well as data protection-were identified that must be addressed when regulating digital lending. Regulation of digital lending must therefore address all these aspects through collaboration of regulators. The proposal in the Bill where CBK was to be the sole regulator therefore required further thought
Panelists discussed some of the risks that digital lenders deal with. They include fraud, ability to repay loans and moral impetus (willingness to pay a loan). In their view, credit reporting, implemented through credit reference bureaus can mitigate some these risks. On declaration of the COVID-19 pandemic, digital lenders were delinked from credit reference bureaus. The Digital Lenders Association of Kenya (DLAK) explained that without access to these bureaus, digital lenders had limited means of assessing a customers ability to repay, hence complaints by some customers on deletion of their loan limits. DLAK also explained that digital lenders have contracts with wholesale lenders, majority of whom are foreigners creating additional risks and extra charge while converting currency. Many of these lenders them pulled back when they felt that there was no adequate risk profiling, resulting in poor liquidity.
Regulation can also assist in risk management and to that end, the DDLAK had contributed to the Financial Markets Conduct Bill 2018, the Data Protection Bill 2019 and collaborated with the technical working group on consumer education on the credit reference bureaus.
Issues of consumer protection were also raised. These include making consent meaningful through measures such as using simple and accessible language. It was noted that the Data Protection Act should be applied to address misuse of borrower’s data. However, there is need for a predictable rules to facilitate meaningful objection to data mining for borrowers.
The discussion elicited debate on digital lending versus traditional banking, with some viewing digital lending as just lending but on a digital platform and others identifying specific issues evident in digital lending. One such issue is debt culture, or living off loans, a byproduct of mobile digital lending. Lack of full disclosure to customers on what digital lending entails could be viewed as predatory as most digital loans are offered to low income earners who are desperate for the money. Yet for all the personal data they give, they have little knowledge on the viability of players and compliance, no clear documentation on the scoring list and how lenders profile their customers. Lastly, there is a security threat on the protection of authenticity, customer and data. Hence, there is an urgent need to control and monitor debt culture through regulation.