CBK to Control Pricing of Lending Rates for Mobile Loan Apps

The Central Bank Amendment Bill 2021 includes a clause that gives the regulator a mandate of controlling digital lenders’ products, management, and sharing of borrower information.

Chief Officer, Financial Services at Safaricom, Sitoyo Lopokoiyit, having a conversation with Dr Patrick Njoroge CBK Governor

The parliamentary committee on Finance and National Planning has given the Central Bank of Kenya (CBK) powers to control and price the lending rates for mobile loan apps under a new proposed bill.

The Central Bank Amendment Bill 2021 includes a clause that gives the regulator a mandate of controlling digital lenders’ products, management, and sharing of borrower information.

The move is welcome particularly now that mobile loan apps feature steep lending rates that have sent many borrowers into debt traps and predatory lending.

Initially, the bill was silent on the high lending rates subjected to borrowers by the digital lenders giving them the freedom to play by their own rules. The preceding bill only stated that digital lenders were subject to similar rules as commercial banks that only seek the CBK’s nod for new products and pricing that includes loan charges.

The amended bill is, therefore, a first and is aimed at curbing the malpractices conducted by various digital lenders.

The report has been tabled before the parliament for approval before it is passed into law.

“The committee has explicitly granted CBK powers to determine pricing parameters. This will ensure that CBK does not necessarily set the lending rate but rather provide parameters within which digital credit providers shall set the cost of credit,” said Kevin Mutiso, chairman of Digital Lenders Association of Kenya (DLAK).

The proliferation of mobile loan apps in Kenya has seen many Kenyans quickly prefer them over conventional loans that require lengthy processes and approvals.

However, digital lenders are not clear on their loan terms and do not provide full information to the borrowers regarding pricing, punishment for defaults, and recovery methods.

Their freedom has seen digital lenders increase interest rates to as high as 520 percent when annualized, leading to the ever-increasing number of defaulters.

M-Shwari, the market leader in digital lending that was introduced by Safaricom and NCBA in 2012, charges an interest rate of 7.5 percent on credit regardless of its duration. This pushes the annualized loan rate to 395 percent.

The annualized loan rates for Tala and branch, the top players in the mobile digital lending market stand at 152.4 percent and 132 percent, respectively.

Statistics from the CBK show that mobile loans from unregulated lenders grew from 200,00 in 2016 to over 2 million shillings three years later.

The push to have digital lending controlled comes more than a year after the country did away with the legal cap on commercial lending rates.

The cap, which was introduced in 2016 is responsible for triggering an appetite for digital loans after banks shunned individuals and SMEs only to lend to corporates and large enterprises.

If the new amended Bill is passed, the CBK will determine minimum liquidity and capital adequacy requirements for digital credit providers akin to conditions set for operating a bank in Kenya.

MPs rejected the proposal on capital and liquidity, saying digital lenders do not take deposits and, therefore, pose no danger to public funds.

Digital lenders will also be required to disclose to the CBK the source of funds that the institutions are lending to curb money laundering and terrorism financing, out of concerns that these apps could be used to launder illicit cash.