How CBK’s Covid relief measures killed unlicensed mobile lenders

Central Bank of Kenya (CBK) Governor Patrick Njoroge.

On Saturday, Arnold received an SMS from mobile lender Tala regarding a Sh35,964 loan that he took before the Covid-19 outbreak in early March. 

It read: “Special discount is ending. Pay Sh24,000.00 to clear Tala loan of Sh35,964. Avoid paying full balance. Pay and apply again.”

These desperate measures are being taken by virtually all the 100 digital credit lenders in Kenya, whose operations were dented by a directive issued six months ago barring them from listing defaulters with Credit Reference Bureaus (CRBs).

Kevin Mutiso, the spokesperson for the Digital Lenders Association of Kenya (DLAK), said the desperate measures were being taken across their membership.

This is even as other players in the financial sector are celebrating the lifting of emergency measures that saw them prevented from blacklisting loan delinquents came to an end on October 1.

As soon as Covid-19 struck, digital lenders agreed to waive all accruing late fees. The lenders, said Mutiso, would be content with getting back their principal and interest.

But things were worse than DLAK had anticipated. “Some us decided to start using what we call hair-cuts,” he added, meaning that they offered further reduction on the outstanding amounts to encourage borrowers to pay.

“Because we realised that, again, the market was struggling and we are just trying to recover as much money because we have lost so much anyway. Whatever we can get before we write them off,” Mutiso said.

Since Kenya registered its first case of Covid-19 in early March, leading to a steep decline in liquidity, digital lenders have taken a serious hit with loan disbursements declining from between two and four million a month to just over 200,000, according to Mutiso.

“As soon as President Uhuru Kenyatta said there would be no listing of loans, I think what we call strategic defaults began to happen,” he said.

With the fear of being blacklisted removed, many people decided to hold on to their cash until they really had to pay the loan.

“That created delinquencies in all our portfolios,” said the DLAK official, with many lenders running into losses and others getting out of the business altogether.

“If we have any money left, we are only lending to the very best customers, those that didn’t take advantage of strategic default and kept to their obligation.”

Credit information

Central Bank of Kenya (CBK) Governor Patrick Njoroge, who has in the past linked digital lending to money-laundering and terrorism financing, in April barred the lenders from using CRBs, effectively denying them a critical tool in assessing the credit-worthiness of a potential borrower.

CBK also withdrew the approvals granted to unregulated credit-only lenders as third party credit information providers to CRBs.

“The withdrawal is in response to numerous public complaints over misuse of the credit information system by the unregulated digital and credit-only lenders, and particularly their poor responsiveness to customer complaints,” CBK said.

“Thus, unregulated digital and credit-only lenders will no longer submit credit information on their borrowers to CRBs.”

It was a blow to hundreds of fintech credit providers such as Tala and Branch International, which had become household names with nearly every functional smartphone in Kenya having a digital lending app.

Six months later, as Dr Njoroge last week announced the end of the emergency measures aimed at giving some breathing space to borrowers distressed by the pandemic, he remained silent on the future of the mobile lending platforms.

In a statement, CBK said the six-month suspension ended on September 30 following which the existing procedures for risk classification of loans with respect to their performance and subsequent listing with CRBs would apply.

“Specifically, financial institutions will from October 1, 2020 assess the performance of all loans that were performing before April 1,” read the statement.

However, the regulator steered clear of the earlier decision to bar unregulated mobile lenders from using CRBs.

A month after excluding them from using CRBs, the governor intensified his attacks on digital lenders, mockingly comparing their size in the credit market to a “flea in the economy.”


Njoroge said the digital lenders’ decision to stop lending after the onset of the Covid-19 pandemic was inconsequential, with the volume of their loans estimated at one per cent of the economy.

In a no-holds-barred attack, he told the firms to either submit to regulation or ship out to the “Wild West” where he said they belong.

“Those that believe they can’t survive in a sector under supervision, that is fine, they can go,” he said.

“I think the expectation that just because somebody is lending using a mobile phone they can do whatever they like... maybe they can go to the Wild West, that is where they belong, not in a proper economy.”

Since then, mobile lenders have lost millions of shillings after borrowers, many of whom previously paid back the money out of fear of being blacklisted and missing out on other credit facilities — or even job opportunities — refused to pay the loans.

Branch, which was cited for debt-shaming in a recent article by Financial Times, is reported to have offered a 40 per cent discount on unpaid loans.

The firm, however, denied using aggressive methods to recover its loans noting that it even gave repayment holidays to borrowers distressed by the coronavirus pandemic.

While unregulated lenders have expanded credit to a segment of the population that banks have avoided, thus helping deepen financial inclusion, they have also been accused of charging high interest rates and using crude methods to recover their money, such as calling friends and relatives of the borrower.

Unregulated digital lenders and microfinance institutions have not been in Dr Njoroge’s good books.

Last year, in his effort to nab holders of dirty cash by withdrawing the old Sh1,000 notes, the governor identified the two as probably his weakest link in the fight against illicit financing.

He compared the ubiquitous mobile lending platforms to “your typical money laundering schemes” which, he said, posed a serious threat to the country’s financial health.

“Where are they getting the money from? I mean, you can see that this could be your typical money laundering scheme,” said Njoroge.

Regulators’ notice

Earlier, CBK and other financial regulators including Capital Markets Authority, Insurance Regulatory Authority, Ministry of Trade, Industry and Co-Operatives, Retirement Benefits Authority and Sacco Societies Regulatory Authority advised the public to only deal with “regulated and licensed” financial providers.

This, in effect, left out prominent digital credit providers such as Tala and Branch — which were registered as companies.

In a notice, the regulators sought to draw the attention of the public to the emergence of unlicensed financial services and products.

“These services include online pyramid schemes, credit and savings schemes as well as fraudulent mobile loan applications downloadable from mobile app stores, including Google Play and App Store,” said the regulators in July 2019.

Three factors interacted to create a thriving market for digital credit providers: the ubiquity of mobile money where almost every adult uses a phone to send money; availability of cheap mobile internet, and rigid commercial banks made it hard for the majority in the informal sector to access credit.

There are over 100 digital lending apps on Google Store offering micro-loans of between Sh500 and Sh50,000. Besides Branch and Tala, others include Okolea, Mkey and Utunzi.

Their annual interest on loans, including fees and fines, can be as high as 1,685 per cent, according to a calculation by development organisation Financial Sector Deepening (FSD).

The allure of using mobile phones as a tool for financial services is laying debt traps for many borrowers, with most stuck in a vicious cycle of borrowing from one digital credit provider to pay another.

A 2019 survey by FSD showed that 14 per cent of the digital borrowers were balancing loans from more than one digital lender, pointing to a refinancing crisis in which one borrows from Paul to pay Peter.

Six per cent of the respondents in the survey said they used the money to repay other loans, both digital and non-digital. That is why to some observers, digital lenders have been nothing but sophisticated shylocks.

They may not have employed crude methods of debt recovery as your typical shylock — such as breaking into people’s homes and making away with a home appliance — but a few of them have perfected cyber-bullying and spamming as a means to get back their money.

There were a few that would simply bombard borrowers with calls even as they forwarded their names to the three registered CRBs for blacklisting.

This worked out well for them. A defaulter listed at CRB will not only be unable to access credit from other financial providers, but some employers also require job-seekers to show proof that they had no bad loans.

Stories abound of how some of the unregulated digital lenders drove defaulting borrowers into depression.

However, an incident that saw a borrower commit suicide, according to an article in a local daily, saw CBK’s patience with unregulated digital lenders snap.

“In November last year (2018), a lady came to the Central Bank to explain to us that her husband had committed suicide after getting involved with one of these lenders,” Deputy Governor Sheila M’Mbijjewe was quoted by the local daily as saying.

It was then resolved that there was need for regulation — the sticking point was on who between the National Treasury and CBK was to bell the cat.

A major concern is how some of the lenders have been operating on different standards from those in their home countries.

While most of the American companies such as Tala and Branch knew of tighter controls at home, they took advantage of the lax regulatory environment in Kenya to extract huge profits at the expense of consumers.

Last year, Google came up with new regulations that prohibited digital lenders that engaged in predatory lending from its Google Play.

Apps for personal loans, noted Google, were required to disclose the minimum and maximum period for repayment. They also had to show the maximum Annual Percentage Rate (APR), which generally includes interest rate plus fees and other costs for a year, or similar other rate calculated consistent with local law.

Lending rate

“In the United States, we do not allow apps for personal loans where the APR is 36 per cent or higher. Apps must display their maximum APR, calculated consistently with the Truth in Lending Act (TILA),” said Google.

Yet in Kenya, according to calculation done by FSD, the APR for non-banks, including fintech lenders could be as high as 1,685 per cent.

If there are institutions that had staked their hopes on the spoils of last-mile financial inclusion that has been trumpeted from the highest levels of decision making, it is the digital lenders. And it looked like they were getting what they wanted.

According to FinAccess, a survey on financial inclusion that is done every three years by CBK, Kenya National Bureau of Statistics and FSD, use of digital loan apps registered a jump in 2019 to 8.3 per cent compared 0.6 per cent in 2016.

The increase was the highest compared to other financial providers including banks and Saccos.

There is a currently a draft law in Parliament aimed at bringing the regulations of all digital credit providers under the ambit of CBK.