An Open Letter to Central Bank of Kenya Governor Patrick Njoroge

Patrick Njoroge, CBK Governor

Dear Sir,

I was delighted that you noted that “the risks to Kenyans showed there was a need for regulation in the booming [digital credit] sector” (Reuters report of 29th May 2018). While many of these small digital credit loans are immensely valuable for people facing emergencies, managing cashflow problems or for small scale trading, there are significant downsides that deserve attention.

I sympathise with your concerns about Kenya “being a guinea pig for new technology deployed by foreign companies”. However, the three largest digital credit lenders (M-Shwari, EazzyLoan and KCB-M-PESA) are Kenyan entities. It is fair to say that in Kenya, as in many other African countries, the development of digital credit was sponsored by international development agencies. This was done with good intentions, if little foresight of the unintended consequences. However, the continued celebration of the quantity of loans issued without reference to their quality is alarming.

And the quality of this portfolio is alarmingly poor. There is growing evidence that a worrying proportion of these digital credit loans used to finance the sports betting epidemic that is sweeping the continent. Perhaps as a result, a recent study noted that borrowers default on a third of first cycle loans and are negatively listed on the credit reference bureaux (CRB).

As a result, as on March 31st 2017 10 per cent of the adult population of Kenya was negatively listed on the CRB – nearly a million of these for amounts of less than USD 10. Now, more than a year later, the number of people negatively listed exceeds 3.5 million. Many remain negatively listed because of the Ksh.2,200 required for a clearance certificate to remove their names from the bureaux lists.

There has been much discussion of the interest rates associated with these loans. However, these largely reflect the risk associated with making them given the high rates of default. Nonetheless, the effective interest rates for many are even higher than those published by many of the lenders. This is because many borrowers (for example day traders) repay well in advance of the monthly duration of the loans. The typical month-long digital loan, with a fixed interest rate for that month, is simply inappropriate for these borrowers. Small wonder that 36 per cent of these loans are repaid within a week – and sad that these borrowers receive no interest rebate.

Clearly, there are many opportunities to re-engineer these loans to make them much more fit for purpose. Relatively small tweaks to the structure, marketing and pricing could increase transparency, reduce delinquency, help borrowers and thus actually increase the returns for the lending institutions.

Given the alarming number of Kenyans now carrying the “negatively listed” stamp, it’s time for policymakers and digital lenders to act. The CBK might consider introducing and enforcing:

  • incentives for auto-submissions from bank databases to CRB to improve accuracy of the bureau data
  • an amendment for digital credit to the Credit Reference Bureau Regulations (2013) to incorporate a minimum loan amount for the listing
  • (as CBK has already stressed) requirement that lenders use nuanced credit scoring mechanisms basis the “balance” (value of the loan outstanding) and “number of days in arrears” fields in the CRB’s database. This would allow lenders to vary interest rates and loan sizes according to the credit history/risk profile of the borrower – as M-Shwari already does with loan sizes.
  • mandate for all off-shore, app-based lenders to report into the system (note that some, including Branch and Tala, do already report to the bureaus)
  • regular audits of the CRB digital credit database for accuracy and completeness
  • accessible, efficient and cost-effective mechanisms for consumers to check their credit history and correct any errors
  • clear guidance on clearance certificate requirements for financial institutions to follow (e.g. circumstances when these may be requested, the certificate fee schedule etc.)
  • mandatory requirements to ensure transparent terms and conditions are communicated to potential borrowers so that customers can make informed choices
  • minimum standards for customer recourse channels and coordination by partners to address issues/complaints raised by customers and thus drive long-term usage and customer loyalty
  • a curb on the aggressive, SMS-based, push marketing that is so common, thus reducing predatory lending

Kenya appears to have already started with the proposals for the Financial Markets Conduct Bill.

In anticipation of these changes in Kenya, and indeed throughout Africa, digital lenders should seize the opportunity to re-engineer their loan products to better cater to diverse needs of all potential digital borrowers. Many of the digital credit providers (including those in Kenya and those based in South Africa and Silicon Valley) are already working on these types of improvements.

But a little regulatory push may help accelerate the pace of positive change.

Yours faithfully,

Anup Singh, Principle Consultant – Banking Financial Services at MicroSave

(Anup leads Banking and Financial Services domain for MicroSave (an international financial inclusion consulting firm with 20 years of experience, 11 offices around the world, 175 staff, managing projects in ~ 50 developing countries) in Africa)




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