Relief for mobile lenders as CBK to maintain clear interest limits

By OTIATO GUGUYU
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Summary

• CBK Governor Patrick Njoroge on Tuesday ruled out the possibility of setting a cap for digital lenders, saying they would apply the loan pricing models used by banks.
• Digital lenders, however, may not have carte blanche given the indirect control that CBK will exercise over the approval of charges.
• The regulator has succeeded in keeping lending rates low by requiring each lender to justify the margins it puts in its formula.

Mobile lenders will have the freedom to set their own lending rates even after falling under the regulation of the Central Bank of Kenya (CBK).

CBK Governor Patrick Njoroge on Tuesday ruled out the possibility of setting a cap for digital lenders, saying they would apply the loan pricing models used by banks.

“If you mean we have some sort of caps and things like that, obviously the answer is no. We are no longer going to this part of the world, we have already explained why, ”Dr Njoroge said after the Monetary Policy Committee press conference yesterday.

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.

This has raised concerns among industry players that they will be subject to caps as part of their offer to cut high rates on digital loans that have plunged many borrowers into the debt trap and encouraged lending. predators.

Digital lenders, however, may not have carte blanche given the indirect control that CBK will exercise over the approval of charges.

When Kenya removed legal controls on credit charges on November 7, 2019, the CBK warned banks against returning to punitive interest rates of over 20% in the rate cap regime.

The regulator has succeeded in keeping lending rates low by requiring each lender to justify the margins it puts in its formula.

He had asked banks to submit a new loan pricing formula that would serve as the basis for setting interest rates on new loans in an environment that has for the most part not been approved.

The governor of the CBK has said he will use the same approach when it comes to digital borrowers, which means they will have to justify the high price of the loans.

“What we’re doing and I said on the banking side is making sure the pricing is appropriate in a lot of ways and I think you’ve already seen what we’ve done with the banks. pricing principles that we have, things related to how they should treat customers, ”Dr Njoroge said.

“So I think it’s a really good model to start with. That’s not to say it will be translated verbatim, but definitely the direction is clear.

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, 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.

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.

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 lending market, offer annualized interest rates of 84-152.4% and 156-348% respectively.

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.

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