The Credit Reference Bureaus (CRBs) have proposed a vetting tool for digital lenders before their return to share data on customer loans.
The bureaus said their lobby, the Credit Information Sharing (CIS) and Financial Sector Deepening (FSD), an independent trust focused on attaining an inclusive financial system, had presented to the Central Bank of Kenya (CBK) a criterion of screening the digital lenders before re-admitting them to sharing information on loan payments and defaults.
“Approval has been sought through submissions by CIS Kenya to CBK on behalf of the industry. It is anticipated that CBK shall give its approval to allow for a full roll-out of the Onboarding Procedures,” FSD says in a report.
The CBK locked out 624 digital lenders and credit-only providers from sharing information on loan payments and defaults last year in the wake of customer complaints about the misuse of the CIS mechanism.
The CBK also kicked out credit-only microfinance institutions from sharing borrower’s data.
CRBs are allowed to contact third parties, including digital lenders for information on loan payments and defaults, for onward sharing to banks, microfinance institutions, and saccos.
The bureaus said the vetting criterion had proved effective with only five of the 16 digital lenders getting past the test.
The new tool was also tested on nine unregulated micro-finance institutions, two trade creditors, four saccos, and 16 leasing companies.
Some of the digital lenders who participated in the new FSD vetting tool failed because they could not address customer concerns in person, had no physical location, or did not disclose terms and conditions.
They also failed the test because they only wanted to use the CRB mechanism to leverage loan recovery by threatening to list clients and although they captured a lot of data electronically, their data submissions had errors that required corrections hence the low completion rates.
The new model proposes a checklist comprising a questionnaire that captures information on the legal, operational, technical, and staffing capacity of the credit provider.
Upon completion of the checklist stage, the credit provider is taken through the data submission template and their data capture process reviewed to determine compliance level.
Digital lenders have been accused of abusing personal data from defaulters to bombard relatives and friends with messages regarding the default and asking third parties to enforce repayment.
This has been partly attributed to the fact that digital borrowers are twice as likely to default as those that take conventional loans as a result of multiple borrowings and use of the funds for consumption, according to research by Digital Credit, Financial Literacy, and Household Indebtedness.
The low-value loans and short repayment period have resulted in high rates of default and negative listing and digital borrowers made up 90 percent of the black-listed Kenyans before the regulator intervened.
The lock-out of digital lenders from CRB listings saw a 50 percent decline in loans issued over mobile phones with the Digital Lender Association of Kenya (DLAK) estimating that the value of loans issued each month fell by half to Sh2 billion.
In a bid to tame rogue players, the government has proposed a new law in which digital lenders will be licensed by the CBK.
A key aim of the government-backed CBK (Amendment) Bill 2021, which is before Parliament, is to curb the steep digital lending rates that have plunged many borrowers into a debt trap.
It will also seek to push out rogue players amid concerns of unethical practices such as money laundering, illegal mining of customer private data, and shaming of borrowers who default.
The banking regulator will be expected to determine minimum liquidity and capital adequacy requirements for digital credit providers akin to conditions set for operating a bank in Kenya.