Central Bank rescues borrowers from fangs of digital loan sharks

Digital lenders shaming debt defaulters or reporting their names to Credit Reference Bureaus (CRBs) for not paying loans of up Sh1,000 now face fines and closure as they officially come under regulation.

The Central Bank of Kenya (CBK) has now published the Digital Credit Providers Regulations, 2022 which will require all digital lenders to apply for licences by September this year or close shop.

The regulations, meant to bring digital lenders under formal supervision for the first time, also bar them from arbitrarily varying the price of loans and caps the money they can recover from defaulting customers.

CBK regulations expressly bar digital lenders from using threats, violence, “obscene or profane language against customers or their references or contacts for purposes of shaming them” in the course of debt collection.

The digital lenders have also been prohibited from accessing a customer’s phone book or contacts list and sending them messages in the event of debt default.

They will also not be allowed to post a customer’s personal or sensitive information online or make unsolicited calls or messages to the contacts in their phone books. According to the regulations, CBK will revoke licences of such digital lenders and their directors fined up to Sh500,000 or jailed for five years or both.

Digital lenders have also been barred from forwarding names of defaulters of up to Sh1,000 to CRBs. The move offers relief to thousands of borrowers whose credit scores have been hurt over loans tapped to meet basic needs such as food and rent.

“A digital credit provider shall not submit negative credit information of a customer or any other person to a CRB where the outstanding amount relating to the credit information does not exceed Sh1,000,” read the regulations in part.

The proliferation of digital credit had seen the usage of unregulated apps rise from 0.6 per cent of the adult population in 2016 to 8.3 per cent in 2019 before slowing to 2.6 per cent in 2021 after CBK ejected them from CRB platforms.

The digital lenders will also not be allowed to use obscene or profane language or make “unauthorised or unsolicited calls or messages to a customer’s contacts” in the name of recovering defaulted loans. The regulations will help digital lenders return to the CRB platforms after CBK ejected them on April 14, 2020, prompting them to nearly halve their lending to shield themselves from higher defaults.

But barring them from listing loans of up to Sh1,000 may come as a big blow, given that the digital lenders said they had witnessed increased defaults among customers in the absence of CRB.

Digital lenders intending to list customers for defaulting on loans above Sh1,000 will also have to issue a 30-day notice or within a shorter period as the contract may provide.

The firms will also not be allowed to charge interest that exceeds the principal owing at the time a loan falls into default in a move to rescue defaulters from punitive charges.

To rescue borrowers from opaque lending practices, CBK will now require digital lenders to disclose all charges and fees, interest rate and total cost of credit—made up of principal, interest, fees and other charges. Digital lenders seeking CBK licensing will, among other things, submit to the regulator the pricing model and parameters, stating the interest rate and whether it is applicable on introducing balance or not.

“A digital credit provider shall not introduce a new digital credit product to the market or vary the features of an existing product without the bank’s prior written approval,” say the regulations. Digital lenders will pay Sh5,000 as an application fee and thereafter if the application is accepted, an annual licence fee of Sh20,000.

CBK will be gazetting the list of licensed digital lenders by March 30 every year.