The digital lending space

I recently heard an advert in a local vernacular media station of how one does not require a credit officer in a lending institution anymore with the availability of lending options available at the palm of your hands on your phone. The self-appraisal and ease of access was the catch phrase and the enthusiastic radio presenter was surely doing a good job on that advert.  

A quick show of how the digital space has come with several opportunities. The thought of increased liquidity and availability of small business loans and the convenience of accessing monies without the hassle of the informal money lenders are indeed exciting.

We most likely have seen an advert somewhere of applications one can download on a mobile phone, provide personal details and after a review of one’s phone transactions, social media profile and contacts one gets a feedback of some credit limit that can be accessed with the promise to increase the limit on successful payment of loans.  

The offers

Digital loans are packaged quick turnaround applications and have indeed come handy for their users. The need for monies is insatiable at all levels hence the expanding market for the apps.

Onboarding requires one to create a profile and provide an identity document. This can easily be verified through the integrated population register system. Further the apps require one to respond to a simple questionnaire on his or her income abilities and maybe link his or her social media profile to the application.

There is rapid increase of the number of apps offering digital credit. Below is a sample of the lending platforms common in the market.  

Application/Website	Interest Rate in %	Amounts Offered in KShs.	Frequency	Other Fees in %	Annual Rate
Branch	1-13.9	250 - 50,000	Monthly	unknown	12% - 170%
Tala	5 Onwards	1,000 - 30,000	Monthly	unknown	63% Onwards
M-Shwari	7.5	100 - 20,000	Monthly	unknown	91%
KCB Mpesa	14	50 - 1,000,000	Variable	2.5	27% Onwards
Okolea	5 Onwards	Not Defined	Monthly	unknown	63% Onwards
Equitel	14	50 - 1,000,000	Annual	1	27% Onwards
Pesa Pata	30	1,000 - +	Monthly	unknown	365%
Zindisha	5 Onwards	100 - 1,000,000	Variable	unknown	63% Onwards
Okoa Stima	10	100 - 1,000	Weekly	unknown	521%

The price of the convenience comes at a high cost to the borrowers. The lenders have also taken a risk with their capital and have heavily invested to have the apps running efficiently. 

Apart from the nominal rates charged, the apps charge undisclosed amounts in the event of a default. The loans are rolled over and new rates apply to the new amounts in case of a default in the payment time. From the sample above, it’s clear that the loans are costly.

The apps are unregulated businesses, they are thus not required to report in any credit information sharing platform. This increases the potential of multiple borrowing by their customers. Instances of a borrower borrowing from one app to repay another cannot be ruled out.

The lenders have also gone a step further and market their platforms in several ways. An SMS to your phone, a pop up when you login to check mails or catch up with social media. The lenders just know how to create presence.

With the ever expanding digital space in Kenya, Digital credit growth will continue. Whether their practices are ethical or not is yet to get any scrutiny. The markets are moving faster than the regulators. Digital credit has the potential to benefit the consumers but requires regulation to avoid the many risks it comes with.

Kahugu Muiruri

May 24, 2018

Credit Information Sharing developments in Kenya

Year 2008 saw the amendment to the Banking Act spearheaded by the Central Bank of Kenya to create an enabling environment for credit information sharing in the banking sector. This was premised on creating stability in the financial services sector.

The amendment created a forum for permission to share credit information and the regulations to be followed in the sharing mechanism. The legal and regulatory framework came into place in the year 2009.

With the market being wider than what commercial bank covers there have been developments towards having additional players brought on board and subsequent amendments to the Sacco Societies Act and the Microfinance Act also being brought into conformity to the information sharing mechanism.

The Operational Space

The Central Bank licenses the Credit Reference Bureaus (CRB’s) as information custodians and participating institutions submit to and get information from the CRBs about their potential and existing borrowers. There are agreed formats and rules of engagement for sharing credit information. We currently have 3 licensed bureaus.

The immediate shortcomings once the sharing platform commenced in 2009 was that institutions were initially sharing the negative information meaning if customers who were up to date in their payments their full credit information was not available.

Year 2013 saw the expansion of the regulations to net in the full credit profiles for the borrowers. This meant that the participating institutions had to share both positive and negative information. The changes also netted in Regulated Micro-finance institutions. The CRBs business was expanded to include credit scoring, permitted CRBs to collect information from Third party legal institutions like Company registries, Court registries, land registries, licensing authorities among others.

Also, subject to consent, third parties may also obtain information from Bureaus for purposes of their decision making. It’s also important to note that the Bureaus are under strict supervision of the Central Bank of Kenya.

Credit information is private information and we all have a right to privacy. The amendment to the banking act is clear on the objectivity of the need for the information. Banks, lenders and all legal entity requiring the credit information must engage within the rules. Credit profile information is not public information.

There exist safeguards on what can be shared. Information that is mandatory for the purpose is limited to the objective content required for decision making on the subject matter involved. For example, the identity prior to disclosure the most common is the national identity document as the unique identifier. Information is only shared and obtained through licensed CRBs by authorized sources.  

The public is also given the right to information by having any person whose information is to be shared to be informed through a pre-listing and a post-listing notice. The information providers should provide the correct information to the bureaus. All players are required to have competent personnel to handle and explain information where required. A listed entity has a right to a free copy of the information annually, access to information and in case of a dispute to have the information corrected in a defined procedure.

With time the challenges that the mechanism has encountered are matters that can be resolved without acrimony since our supreme law provides for alternative dispute resolutions before court actions. Proper record keeping and competence and timely resolution of the disputes that may arise is helping a great deal in the sharing mechanism settling in.

The Shortcomings and future development areas

Despite the developments for the information sharing mechanism, there are challenges in the framework. For example, there is absence on a uniform regulatory system, there lacks clarity on the participation of third parties, more inclusivity needed in the regulations and credit reports are not homogeneous pointing to a need of solid validation rules to be adopted by the bureaus. The legal anchoring of the framework is not solid and even in cases where listed parties have gone to court we need develop jurisprudence on the same.

     

As mentioned earlier, the market is wide and has many players with interest in participation. There is lots of legislation needed on the existing Credit information sharing framework. Considering the scope of the profile we would want to create and as the law is expansive there is need to net the various lenders outside the coverage of the framework like Saccos, Government lending initiatives, Agriculture Finance companies, Utility companies, Venture Capital providers.

Lenders are also known to use for the last few years the credit profile reports from CRBs as a basis for lending to new and existing borrowers. Curiously though is the fact that despite the information available to lenders and more so regulated lending institutions, the volumes of non-performing loans in increased from KShs. 207 Billion in year 2016 to KShs. 272 Billion in year 2017 as per the 2017 CBK summary reports. Are we making good use of the credit information available as lenders?  

Kahugu Muiruri

May 12, 2018