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    Why Ruto May Not Be Sworn in Even if He Wins

    Why Ruto May Not Be Sworn in Even if He Wins

    READ: Did you know that the law now recognises Intersex children?

    Breaking: Judiciary fund operationalised 12 years later

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    Rwandan’s in Diaspora Deposit Sh926 million

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  • Markets
    Rwandan’s in Diaspora Deposit Sh926 million

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Why mobile loans rate control plan is bad for small borrowers

by Kenyan Business Feed
June 12, 2019
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Ideas & Debate

Why mobile loans rate control plan is bad for small borrowers

Wednesday, June 12, 2019 20:09


By PHYLLIS KAMAU |

Mobile loan
Mobile loan borrowers often take the money to meet daily family and business needs. PHOTO | FOTOSEARCH 

There has been continuous negative misrepresentation of digital lenders as shylocks out to defraud and take advantage of consumers.

This distortion is informed by a general lack of understanding of the unique characteristics of mobile loans, mobile loan borrowers and mobile loan providers.

From their own definition, mobile loans are small- and short-term micro loans provided to borrowers that are usually excluded from formal banks or whose need for credit is so small that no financial institution can consider them.

These borrowers need the mobile loans to meet daily family and business needs or pay for school fees and such other needs, and even if they have no access to digital credit, these borrows are likely to look for other means such as borrowing from families to keep up with their needs.

Mobile loan lenders consist of banking and non-banking institutions. The banking institutions source the money to lend from the public or inter-bank lending hence their cost of funds is low.

On the other hand, the rest of the mobile lenders are private non-banking institutions who must source their funding from investors — often at a high open market rate of interest.

The non-deposit taking mobile loan players cannot fund their loans with cheap deposits and their business model — which includes high cost of conducting KYC (know your customer), investment in technology infrastructure to provide optimum service, customer acquisition, lack of collateral and lending to a high risk market — means the mobile loans by their very character will attract a higher interest rate.

It is in the same breath that banks, which enjoy cheap deposits, have come up with a product called Stawi.

I see this as a purely monopolistic approach of merger of five banking institutions on a horizontal arrangement. This begs the question whether the rate offered by the product— nine per cent per annum — is fair or intended to drive out competition.

A reading of the fine print will demonstrate there are other additional costs on the Stawi product such as a facility fee of four percent, insurance of 0.7 percent and excise duty of 20 percent of the facility.

The private non-bank lenders have no such advantages and hence must price their product higher to cover the cost of funds, operational costs and risk to offer the loans sustainably.

One of the issues that both players and regulators have agreed on in most jurisdictions is the need for consumer protection and financial literacy to ensure mobile loan borrowers make informative decisions and that rules are put in place to protect consumers.

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Such rules ensure that only professional companies are allowed into the market to lend and that regulators have properly investigated licensing mobile loan companies, ensuring minimum capital requirements and practices such as predatory advertising are restricted to protect the consumer.

Additionally, there needs to be comprehensive research on mobile loans before any regulatory response is taken.

Currently there is little data or material in Kenya on the actual loan book of mobile lenders or their non-performing loans, leading to many misconceptions.

Evidence has shown, as concluded in the IMF 2019 report, that interest rate caps in Kenya have had the opposite effect of what it was intended. Therefore, any attempt to cap interest rates for mobile loans, without data or research, will have the same catastrophic effect, if not worse.

The calls by the Senate to re-introduce the Money Lenders Act that was repealed in 1984 is thus not progressive and will not address the current realities on the changing dynamics of credit and the changing consumer behaviours. Due to the rapid change in technology and how technology is rapidly disrupting systems, any regulation must be backed by proper data and research.

A 2019 research report by the European Credit Research Institute concluded that stringent pricing rules are only viable in economies where there are low poverty levels, intense government social spending, high financial inclusion, high household saving ratios and high maturity of consumer credit market.

The recent FinAccess Survey shows that Kenya is far from achieving these indicators and as such, a stringent pricing law will not improve financial inclusion but will kill the mobile lending industry.

Price control should be the last of regulatory measures. The regulator needs to begin with professionalising the industry and ensuring licensing, minimum capital requirements and stronger consumer protection rules to transform the industry.

Recent efforts by the players such as forming their own Digital Lenders Association is a step in the right direction in bringing sanity to the industry.

Regulation should be applied progressively to drive innovation, growth and to protect consumers and must take cognizance of the critical difference between banks and non-banking institutions.

Ms Kamau is a digital lending expert.


Kenyan Business Feed is the top Kenyan Business Blog. We share news from Kenya and across the region. To contact us with any alert, please email us to [email protected]

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