Kenyans are losing their hard-earned cash to rogue mobile lenders who take advantage of the regulatory vacuum to extort cash and personal data from unwitting users.
A recent study conducted by the government, Financial Sector Deepening (FSD) and the Bill and Melinda Gates Foundation found that dozens of mobile lending apps are operating with virtually no regulatory controls.
The apps also set arbitrary fees, and are often malfunctioning.
This comes at a time when more Kenyans are taking to mobile loans for their credit needs, with pressure mounting on the Central Bank of Kenya (CBK) and the National Treasury to come out with a regulatory framework for the rapidly growing sub-sector.
The study explored 110 digital credit products available as of September last year.
It found that close to half of them could not be accessed largely owing to the apps’ instability or sign up fees with dozens of apps disappearing after harvesting users data.
“In September 2018, the two main app stores had approximately 110 mobile apps provided by 74 unique developers listed as offering digital credit,” said the report in part.
“As of April 2019, 65 of these apps had been pulled down from the app stores, while 47 new ones developed by 43 unique developers had emerged.
There was an unprecedented rise in the number of apps published in 2018, from 14 in 2017 to 49 in 2018.”
Mobile lending products have grown in popularity in the country over the last half-decade due to increased adoption of smartphones and availability of products.
This has seen numerous service providers lure borrowers seeking for convenience.
Several banks in Kenya with large loan books, including Equity Group, KCB Group and NCBA now process the bulk of their loans via mobile phones.
They also use online banking, with fewer customers visiting the physical branches.
The tightening credit conditions by commercial banks fuelled by the Banking Amendment Act 2016 - that has since been repealed drove more borrowers to mobile lending.
The demand for digital lending products, however, continues to grow in tandem with Kenyans’ need for loans. Lack of a clear regulatory policy to guide the scope and limit of operations has, however, opened the field to any operators who can develop an app to launch a lending product and attract users.
“The most egregious of these are lenders that are neither non-banks or non-deposit taking Saccos but are mobilising deposits from the public,” explains FSD in the report dubbed Digital Credit Audit report.
One lender, neither licensed as a bank nor a microfinance institution or a DTS, asks potential borrowers to first save by depositing money, through a PayBill number, with the promise of a 12 per cent return, before becoming eligible for a loan.
The study also found that at least 16 lenders demanded payment of a fee ranging from Sh200 to Sh400 during the registration process.
“Some lenders indicated that the fee is for a credit reference check yet there was no evidence of any enquiries on the borrowers’ credit report once the fee was paid,” explains the report in part.
Other lenders did not indicate what the fee was for and in some instances, the registration fees were high than the loan being applied for.
However, other apps encouraged borrowers to write positive reviews in exchange for higher loan limits or cash rewards.
“Some apps have names that mimic well-known lenders. Examples include CoopM-Pesa Credits, Tala Loans Kenya, Tala Pewa Loans, Tala Kash, Tala-Mkopo Instant, Fuliza M-Pesa Loans, Fuliza Sasa, Mkopo Branch Rahisi and many more,” explained the report in part.
The findings have raised concern that the lack of regulatory oversight in the sector is exposing unwitting borrowers to exploitation and debt distress, eroding the very gains of financial inclusion.
“Most consumers often do not know what data is being used, or how their data is being shared, and neither can they easily control how the data is used,” explained the report in part.
“Permissions to read SMSs, call logs, phone contacts and GPS location were the most requested,” stated the report in part.
“For fintech lenders, access to the photo gallery and to read the phone’s identity was also requested.”
Some apps even declined to complete the registration process when permission to read messages was not granted.
According to the 2019 FinAccess report released in April by the Central Bank of Kenya, Kenya National Bureau of Statistics and FSD Kenya, financial inclusion in the country has grown from 75 per cent in 2016 to 82 per cent this year on the back of digital lenders.
However, the prevailing question was whether the reported financial inclusion is translating to real poverty alleviation.
When the FinAccess survey was conducted in 2016, 38 per cent of respondents reported their financial status had improved while 34 per cent said it had worsened.
This year, 23 per cent reported it had improved and 51 per cent said it had gotten worse.
At the same time, while 46 per cent of respondents in 2016 reported the ability to invest in their livelihoods and future, the figure had halved to 21 per cent this year.
Similarly, 36 per cent said they could raise a lump-sum of money in three days in 2016 and in 2019 the figure had dropped to just 19 per cent.
Overall, the 2019 FinAccess study found the vast majority of Kenyans feel their financial status has weakened.
They also feel that their ability to use financial services and products to manage their daily needs, cope with shocks and achieve big goals has significantly declined in the last three years.