Mobile lenders ditch debt collectors to escape sting of debt-shaming law

 mobile loan lending services

A man holds his smartphone with the display of different types of mobile loan lending services displayed on his screen, in this illustration photo taken in Nairobi, December 8, 2021. 

Photo credit: AFP

For nearly three years it was a booming business for debt collectors as they relentlessly pursued borrowers to repay millions of shillings tapped from Silicon Valley-backed fintech.

Lured by sumptuous commissions, the number of debt collection agencies in Kenya grew rapidly mirroring the expansion of digital lenders cheered by the huge appetite of borrowers seeking instant and hassle-free loans that didn’t require collateral and strenuous paperwork. At the peak of the boom, digital loans provided up to 70 percent of the business for debt collectors.

The latest check by Smart Business revealed an end to the debt collection explosion and hefty commission earnings as cautious digital lenders severed ties with outsourced agents in the wake of new stringent regulations by the Central Bank of Kenya (CBK) partly aimed at taming unscrupulous debt collection.

“All the major digital lenders have terminated their contracts with debt collection agents as a precaution to avoid being caught on the wrong side of the law. Everyone now wants to be fully in control of their operations because the Digital Credit Providers Regulations, 2021 touches majorly on debt collection strategies,” an official of a debt collection agency said. Before the CBK regulations, which took effect last year, many overzealous debt collection agents used unorthodox strategies known as “debt-shaming” to recover loans. The agents commonly pursued borrowers to recover loans, either by informing their friends and family using contact information scraped from their phone or by threatening to tell their employers.

The Digital Credit Providers Regulations, 2021 now outlaws debt shaming—forcing digital lenders to cut ties with outsourced debt recovery agents and instead rely on small in-house teams that work with set guidelines.

“Digital lenders have opted for small internal credit control and collection teams for the sake of compliance with the law. Quality control is best done internally or you risk burning your fingers if some rogue outsourced agents went back to illegal debt-shaming tactics,” an official with a leading digital lender told Smart Business.

Revoke licenses

The new law also gives CBK powers to revoke licenses of firms that send information about loan defaulters to third parties in name-and-shame tactics meant to recover the money.

Some small digital lenders in Kenya keen on clawing back their cash, however, still retained the services of debt collectors—leaving them at risk of backlash by the regulator.

Tech firms such as Google have already taken action following the CBK regulations and introduced new stringent rules on digital lenders operating in Kenya aimed at improving the privacy of users and weeding out rogue app developers on Google Play.

Google now requires personal loan apps in Kenya and Nigeria that ask users for sensitive SMS and calls permissions before using them to sign declaration forms. The US tech giant now demands that all existing personal loan apps in the two countries must fill out the forms within 30 days to be allowed to remain on the Play Store.

All new personal loan apps will also have to sign the declaration form before they are allowed on Google play.

“We are introducing additional requirements for personal loan apps targeting users in Nigeria and Kenya. Personal loan apps in these two countries must complete declaration forms and submit documentation for our review in order to remain or publish new personal loan apps on Google Play,” the company said in a statement in December.

The move by Google came at a time digital lenders had increasingly come under the spotlight for misusing private data of users by inundating borrowers, their friends, and relatives with calls and text messages about their loans.

The apps often require users to allow them to access their calls, SMSs, contacts, and other permissions before they are allowed to use them.

CBK in September 2022 announced it had approved 10 digital lenders who had complied with new digital lending laws and granted them operational licenses.

This is out of the 288 applications for the licenses that the apex bank had received since March.

The Digital Credit Providers (DCPs) that were licensed include Ceres Tech Limited, Getcash Capital Limited, Glando Africa Limited (Trading as Flash Credit Africa), Jijenge Credit Limited, and Kweli Smart Solutions Limited.

Others are Mwanzo Credit Limited, MyWagepay Limited, Rewot Ciro Limited, Sevi Innovation Limited, and Sokhela Limited. CBK ordered all unregulated digital lenders who did not apply for the licenses to cease operations.

Protect borrowers

The Central Bank of Kenya (Amendment) Act, 2021 placed the DCPs under the purview of the CBK to protect borrowers from predatory lending practiced by digital lenders. Under the Digital Credit Providers Regulations, 2021, aimed at protecting consumers, mobile phone lenders are now also required to disclose the total charges for their loans, including interest rates, late payment, and rollover fees, before disbursing credit to customers.

Failure to reveal interest charges, late payment, and rollover fees has also been cited as a major problem bedeviling customers who turn to digital loans due to their ease of access given that they do not require collateral.

This is critical because most Kenyans are not aware of their rights and do not read the terms of the loans when signing up for credit—leaving them vulnerable to default due to extremely high-interest charges.

CBK kicked the digital lenders out of the Credit Information Sharing mechanism for misuse of Credit Reference Bureaus to report small defaults that were less than Sh1000 and used the mechanism to leverage loan recovery by threatening to list clients.

Under the Digital Credit Providers Regulations, 2021, the lenders are also obligated to provide the regulator with a Certificate of Incorporation, Memorandum, and Articles of Association of the applicant and that of any significant shareholder.

Directors, chief executives, senior officers, and major shareholders would also undergo a fit and proper test from the regulator which also required disclosure of the source of funds and pricing models.