CBK Gains Power to Control Mobile Lending Rates

By JOHN MUTUA
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Summary

• The Parliamentary Finance and National Planning Committee has approved the 2021 Central Bank Amendment Bill and added a clause that gives the CBK the power to set interest rates on digital loans.

MPs have offered the Central Bank of Kenya (CBK) express powers to control the lending rates of digital mobile lenders under a proposed law that will see the regulator monitor their products, management and information sharing on borrowers.

The Parliamentary Finance and National Planning Committee has approved the 2021 Central Bank Amendment Bill and added a clause that gives the CBK the power to set interest rates on digital loans.

Now, the primary focus of the Central Bank of Kenya (Amendment) Bill 2021, which seeks to empower the banking regulator to oversee digital lenders for the first time, is to curb high rates on digital lending that have plunged many borrowers. into a debt trap as well as predatory loans.

The bill was initially silent on lending rates, stating only that digital lenders were to play by the same rules as commercial banks that seek CBK approval for new products and prices that include loan fees. .

The committee’s report is now before Parliament for debate and approval before it becomes law.

“The committee explicitly granted the CBK the power to determine the pricing parameters.

This will ensure that the CBK does not necessarily set the lending rate but rather provides parameters within which digital credit providers must set the cost of credit, ”said Kevin Mutiso, President of the Digital Lenders Association of Kenya (DLAK).

Dozens of unregulated micro-lenders have invested in Kenya’s credit market in response to growing demand for quick loans.

Their proliferation has imposed high interest rates on borrowers, which rise to 520% ​​when annualized, leading to an increase in defaults and an ever-increasing number of defaults.

With little or no access to credit, many Kenyans are now finding that they can get loans within minutes via their mobile phones.

The CBK says borrowers seeking digital loans from unregulated lenders have grown from 200,000 in 2016 to over two million in 2019.

The bill also comes amid complaints that digital lenders fail to provide borrowers with full information on prices, penalties for default and collection of unpaid loans.

Digital lenders have been accused of misusing personal information collected from defaulters to bombard relatives and friends with messages about the default and ask third parties to demand repayment.

The push to control the activities of digital lenders comes more than a year after Kenya removed the legal cap on commercial lending rates.

The cap, introduced in September 2016, slowed growth in credit to the private sector as commercial banks turned their backs on millions of low-income customers and small and medium-sized businesses deemed too risky to lend.

The ensuing credit crunch sparked an appetite for digital lending, attracting unregulated microlenders in response to growing demand for quick loans.

Market leader M-Shwari, Kenya’s first mobile savings and credit product introduced by Safaricom and NCBA in 2012, charges a 7.5% “facilitation fee” on credit regardless of term, bearing its annualized loan rate of 395%.

Tala and Branch, the other major players in the mobile digital lending market, offer annualized interest rates of 152.4% and 132% respectively.

In April, the CBK banned unregulated digital mobile lenders from submitting the names of defaulting debtors to credit bureaus (CRBs).

The committee dropped requirements for the banking regulator to determine minimum liquidity and capital adequacy requirements for digital credit providers, similar to the conditions set for operating a bank in Kenya.

The committee rejected the capital and liquidity proposal, saying digital lenders do not accept deposits and therefore pose no danger to public funds.

The CBK had previously sounded the alarm that mobile credit institutions only dedicated to credit were easily used to launder illicit money.

Money laundering, which involves transferring and disguising illegally obtained money to make it appear legitimate, is mainly used by criminals and corrupt people to clean up their wealth.

The bill requires companies to disclose to the CBK the source of funds that institutions lend to combat money laundering and terrorist financing.