How digital lenders help the economy as financial literacy grows

In recent months, mobile and digital lenders have been getting a lot of attention, greatly helping improve coverage of financial services from 67 per cent in 2016 to 83 per cent in 2018.

Mobile and digital lenders have reaped from Kenya’s huge population of smart phone users. They have helped fill the gap where many people could not access finance because they lacked collateral. By giving credit to more people, this has had a multiplier effect on businesses, health emergencies and critical interventions in the lives of many people.

According to the FinAccess Report released by Kenya National Bureau of Statistics and Central Bank of Kenya and corroborated by the Digital Credit Audit report, a whopping six million Kenyans have at one point accessed a loan from mobile and digital lenders.

As a result, there has been increased concern regarding the regulation of the digital lenders. Rightfully so, because all deposit-taking financial institutions have some regulation, be they saccos, banks or microfinanciers.

However, digital lenders do not receive money as deposit. In a free market where demand meets supply at equilibrium to end up with reasonable prices, the current market rates are fair in comparison to the needs of the public. It needs to be emphasised that these loans are cash that belongs to the lender and not a pool of deposit givers.

In giving them out, there is no real collateral but they rely on data gathering from the user’s devise and other credit sharing or loan platforms to issue the credit. Bearing in mind that most people lack access to finance, digital loans have been a welcome respite. 

The Digital Lenders Association of Kenya (DLAK) has been established for the purpose of self-regulation by looking at the areas and gaps or weaknesses. This can be done in-house by the regulator coming up with measures to protect data privacy and responsible consumer behaviour.

As a measure, the entry and exit from the market will be regulated by the association and through this, there will also be increased awareness and sensitisation done by the association to address some of the concerns of borrowers.

To protect customers, DLAK has created a code of conduct - a set of guidelines for reliable and trustworthy lenders. Lenders following the mentioned above code are thus transparent and the customers can borrow money hassle-free.

Since they arrived in Kenya, digital lenders have helped grow financial inclusion. According to FinAccess report of Feb 2019, the major reason for delays in payments on a digital platform is that customers forget to pay on time. Thus, the report calls for promotion of financial literacy to address consumer protection concerns, and this is one of the issues that DLAK can address.

Digital lenders have done a lot for Kenyans - from saving someone’s life using the Sh2,500 borrowed to buy medicine at the hour of need, to transporting produce to the market that would have gone stale, and paying for utilities such as electricity and water. The list is endless.

Digital lenders have a huge role to play in our micro-economy. Our informal sector is big and contributes a lot to gross domestic product, going by the wealth it creates and the number of individuals its employs. We expect DLAK to tell us the measures they will take in the near future to patch the few weak links.

This is an investment that has disbursed billions of shillings to under-served borrowers and has intervened to stimulate economic growth. Let us have a forum for consumer sensitisation.

The writer is an economist

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