Kenya’s hammer blow for long overdue rental apps

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Kenya’s hammer blow for long overdue rental apps


The Central Bank of Kenya, Nairobi on Sunday 22 November 2020. PHOTO | DENNIS ONSONGO | NMG

summary

  • After much ethical uproar from Kenyan digital loan borrowers, the Kenyan government finally launched a sledgehammer to regulate lawless fintech in December 2021.
  • Kenya’s fintech law, which comes into force in March 2022, indicates that many moons later, the Kenyan government has finally recognized the bad and harmful practices such as high interest rates and harassment of borrowers by the digital lenders.
  • The Central Bank of Kenya (Amendment) Act, 2021 will address infringement or illegality of digital lenders under this sledgehammer of change.

After much ethical uproar from Kenyan digital loan borrowers, the Kenyan government finally launched a sledgehammer to regulate lawless fintech in December 2021.

Kenya’s fintech law, which comes into force in March 2022, indicates that many moons later, the Kenyan government has finally recognized the bad and harmful practices such as high interest rates and harassment of borrowers by the digital lenders.

The Central Bank of Kenya (Amendment) Act, 2021 will address infringement or illegality of digital lenders under this sledgehammer of change.

Most Kenyans have felt the whirlwind and impact of unregulated fintech. As described in my journal article published at the African Interdisciplinary Studies Association (AISA) in August 2019, the sophisticated digital loan apps have done more harm than good.

Although easier access to credit contributes to rampant digital borrowing, it affects the financial health of low-income households through the accumulation of debt and the loss of future credit opportunities.

A significant number of borrowers who fail to repay their loans end up being severely penalized, blacklisted by credit bureaus (CRB) and barred from future loan options.

Sometimes some borrowers have taken drastic measures, including selling their assets or skipping a meal, just to avoid being locked out of the credit system.

A 25-year-old man killed himself two years ago after being blacklisted and banned for late paying Sh3,000.

Although quite late, the amendment to the law is a commendable gesture. It’s time for sledgehammer methods to regulate the pervasive influence these digital lending apps embody under the guise of financial inclusion and indiscriminate borrowing.

To the extent that these companies provide access to quick unsecured short-term loans, a lack of regulation had increased the risks of the borrowers who rely on them.

Areas of concern that need mitigating are high short-term interest rates; invasion of privacy through data mining; Failure to understand why their information is needed and how this determines eligibility for the loans; bias towards customers with small digital footprints; the fraudulent use of SIM cards to register multiple accounts; and lack of technical know-how to operate the complicated user interface.

A heavily unregulated fintech space is evolving into what some scholars have dubbed modern-day exploitation. The “double-edged sword” is cultivating a credit pandemic and lifetime debt, while opening up access to digital credit.

The over-promotion of financial inclusion coupled with the proliferation of mobile lending apps in Kenya has further amplified the existing balance of power within our society. No wonder ordinary people are hit the hardest. It is clear that modern bourgeois society has created new conditions of oppression and new forms of struggle to replace the old ones.

Modern day exploitation is implied here by the conscious buying into the digital loan apps by low-income populations in order to survive; they unknowingly stick to the prescribed rules and take out crippled loans with high interest rates, which they cannot repay on time due to a lack of regular cash flows.

As a result, they end up being severely penalized and enriching the company. Consequently, the launch of digital lending apps aimed at low-income earners inevitably demonstrates the intrinsic interplay of power and authority between these three functions: What’s in it for app companies? What do borrowers have to gain or lose? What is the role of government?

There is little understanding why it has taken the government over 10 years to enact and regulate digital lenders in Kenya. It’s devastating to ask these questions when digital credit has taken root.

Exactly how fintech startups have been licensed to do business without proper implementation of a regulatory framework that protects the consumer from digital credit remains a gray area.

Exactly why the Kenyan government and agencies would be willing to stand by and watch the bottom of the pyramid sink into debt has eluded theorists and commentators.

Given the capital investments channeled into fintech by digital lenders and theories of financial inclusion, it is undeniably challenging that there is still no assessment of the socio-economic impact of digital lending.

Ironically, an assessment of the market study conducted by FSD Kenya in 2018 and another by IFC in 2017 found it difficult to identify the social and economic impact digital lending has had over the past five years. But the glorification continues.

Without a proper regulatory framework, borrower education and transparency, the interactions between fintech startups, borrowers and the government will continue to feel trapped in a financial maze.

But for the borrowers mostly because they lack the financial and technical knowledge to use these apps to their advantage.

This kind of financial paralysis parallels David Graeber’s argument that debt can also be a way of punishing winners who shouldn’t win.

The position that borrowers have been placed in is an attempt to escape from poverty; However, they remain in chains until they can repay their debt to avoid the hefty penalties or being blacklisted by CRB.

I wish these laws were enacted before the fintech space kicked off in Kenya.

More importantly, the process, policies, structure and regulations need to be streamlined on a regular basis, especially when there is a proven case study of financial inclusion success rate.

Njathi is a graduate student in communications and digital media at North Carolina State University

About Sonia Martinez

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