Mobile lenders will reveal hidden fees in new rules

By OTIATO GUGUYU
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Summary

• The Kenya Competition Authority (CAK) said mobile lenders will disclose interest charges, late payments and renewal fees.
• Dozens of unregulated micro-lenders have invested in Kenya’s credit market in response to growing demand for quick loans.
• CAK’s lawsuit of digital lenders comes at a time when Parliament has offered the CBK the power to control the lending rates of digital lending providers.

Digital lenders will be required to fully disclose their fees and penalties to the competition watchdog every four months as part of efforts to address the hidden fees issue.

The Kenya Competition Authority (CAK) said mobile lenders would disclose interest charges, late payments and renewal fees after surveys found that 73% of borrowers were unaware of the cost of their loans.

The competition watchdog said the disclosure would be implemented by June next year as part of the latest attempt to cut high digital lending rates that have plunged many borrowers into the trap of debt as well as in predatory loans.

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 climb to 520% ​​in annualized terms, leading to an increase in defaults.

Now, CAK believes that full disclosure of fees, pricing rules, and the development of structures to guide digital lending costs will increase awareness among borrowers.

“The study’s policy recommendations require digital lenders to provide periodic reports on the actual total fees paid by borrowers, including late payments and loan renewal fees,” the managing director said CAK Wang’ombe Kariuki in the 2021 Auditor General’s Report.

“This report, which can be done on a quarterly basis, will ensure that actual costs and charges are tracked.”

The recommendations followed the CAK’s investigation of complaints that lenders fail to provide borrowers with full information on prices, penalties for default and recovery of unpaid loans.

The survey found that only 27% of digital borrowers knew the fees and costs of their loans.

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

The Central Bank of Kenya (CBK) reports that borrowers seeking digital loans from unregulated lenders have grown from 200,000 in 2016 to over two million in 2019.

“The price of digital loans was not a big factor for borrowers in choosing a lender. The two main considerations are speed of disbursement and ease of repayment, ”said Wang’ombe.

The competition regulator believes consumers need protection from digital borrowers who take advantage of their desperation by failing to provide full information on prices, penalties for default and collection of unpaid loans.

The law allows the competition watchdog to reverse borrowing terms on the basis of misleading statements about loans made to their customers.

The law empowers the regulator to impose a financial penalty of up to 10% of the value of sales of goods or services under investigation.

Digital lenders have also 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 nearly two years after Kenya removed the legal cap on commercial lending rates.

The cap, which was introduced in September 2016, slowed the growth of credit to the private sector as commercial banks turned their backs on millions of low-income customers as well as 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 the NCBA in 2012, charges 7.5% ‘facilitation fees’ on credit regardless of term, which brings its annualized loan rate to 90%.

Tala and Branch, the other major players in the mobile digital lending market, offer annualized interest rates of 84-152.4% and 156-348% respectively.

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

CAK’s lawsuit of digital lenders comes at a time when Parliament has offered the CBK the power to control the lending rates of digital lending providers under a proposed law that will see the regulator monitor their products, their management and sharing of borrower information.

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