1.0. Introduction

1. For a long time, money lending was a preserve of commercial banks which dominate the Kenyan credit market. Many private individuals as well as Small to Medium-sized Enterprises (SMEs) and big corporations relied on credit facilities from commercial banks. Due to this monopoly, access to credit was restrictive.
2. However, there emerged new credit facilities in the form of mobile money lending applications. These applications are ubiquitous and can easily be downloaded from among others, Google Play store and Apple iOS.
3. The flexible nature of mobile money lending applications has largely contributed to a rise in digital lending in Kenya. Mobile money lending requires no collateral, they conduct minimal credit risk assessment for borrowers, the loans are processed quickly and they are accessible to anyone with a mobile phone. This makes digital lending more appealing to borrowers.
4. While the advantages have been documented, especially digital loan services’ contribution to financial inclusion, inadequacies have also been reported. These are driven by issues of lack of industry specific laws, consumer exploitation, exorbitant interest rates being charged, data privacy infringement on account of the vast quantities of personal information found in handheld devices, and the increasing sophistication of cybercrimes.

2.0. Regulation

1. The digital lending sector remains largely unregulated and there have been calls to regulate the digital lending sector. To assert their rights, the lenders as well as their clients have to refer to a myriad of legislations including Law of Contract Act and, Consumer Protection Act. Such a reference, no doubt, creates confusion and loopholes as the legislations are not industry specific.
2. The mobile money lending companies are unique in nature and do not fall under the auspices of the Banking Act because they are not financial institutions as defined under the Act and therefore cannot be regulated or supervised by the Central Bank of Kenya (CBK) neither do they fall under the Micro-Finance Act. There is therefore a lacuna in the law.
3. In 2018, there was an attempt by the National Treasury to draft the Financial Markets Conduct Bill which was aimed at regulating market conduct. Under Section 64, the proposed Bill requires all regulated credit contracts to be in writing in prescribed form. This clearly excludes digital lenders which do not enter into written contracts with borrowers.
4. The Bill is yet to be presented to the National Assembly a year after it was drafted and has received a lot of opposition from sectoral bodies. The Central Bank has criticized the Bill for trying to emasculate the CBK, and stripping it of its powers granted under the law. That said, the mobile lending in Kenya regime faces various challenges as espoused hereunder.

3.0. Interest rates

1. The interests charged by the digital lenders are so exorbitant and are not regulated. They cannot be regulated by the CBK since they are not within the ambit of the Banking Act. Since they are not supervised by any authority or body, the digital lenders set interests rates that are very unfair.
2. Moreover, the In Duplum rule does not apply to them and therefore the danger that arises is the fact that a borrower can pay an interest that is more than twice the principal sum lent to the borrower. The Bill proposes the establishment of the Financial Markets Conduct Authority (FMCA) which will be charged with setting interest rate caps to regulate entities that do not fall under the Banking Act and the Micro-Finance Act.
3. Section 87 of the proposed Bill further makes it an offence to charge an interest beyond the maximum rates as prescribed by FMCA from time to time. While this can be justified on the basis of consumer protection, previous attempts to cap interest rates have been found to have a reverse effect on access to credit by SMEs and individuals.

4.0. Unfair terms

1. The terms of contract entered into by the borrower are usually unfair, and most borrowers are usually ignorant of what they are signing up for. The contract is usually in standard form and mostly drafted in complex unintelligible terms. Because of the urgency and desperation to access credit, most borrowers hardly read the terms and conditions nor do they get an opportunity to get independent legal advice.
2. Indeed, since it is a pre-condition to the loan being granted, most borrowers accept the terms and conditions without reading the terms. While a bad bargain is not a defence in contract law, there is need to protect borrowers as they are susceptible to exploitation by lenders.
3. Under the Section 52 of the proposed Bill, it is an offence for a provider to engage in unfair business practices which include practices that deceive, mislead or unfairly prejudice customers. Moreover, under Section 59, it is an offence to fail to submit pre-contract statements and a quotation in respect to the proposed contract to a customer before accepting an application for credit. The pre-contract statement should specify the interest rates, insurance requirements, fees, charges and costs to be imposed as well as the intervals of payment.

5.0. Know your customer (KYC) compliance

1. Financial institutions are under an obligation to know their customers. KYC is the process by which a financial institution verifies the identity of its clients and their suitability.
2. In Kenya, this is a statutory obligation. Under Section 45 of the Proceeds of Crime and Anti-Money Laundering Act, a financial institution is under an obligation to take reasonable measures to satisfy itself as to the true identity of any applicant seeking to enter into a business relationship with it by requiring the applicant to produce an official record capable of establishing the true identity of the applicant.
3. Section 2 of the Act defines a financial institution as any person or entity which conducts as a business, the accepting of deposits and other repayable funds from the public, lending, including consumer credit, mortgage credit, factoring, with or without recourse, and financing of commercial transactions, among others. Further, under Section 45(2), a financial institution is under an obligation to undertake customer due diligence on the existing customers or clients.
4. This presents a challenge in mobile money lending. This is because mobile money lending takes place in a digital space. Consequently, a lender cannot easily ascertain the true identity of the borrower. A borrower who does not have mental capacity to enter into such a transaction. This may be detrimental to the lender as such contracts are not enforceable by reason of incapacity.
5. Suffice to add, due to its nature, mobile money lending does not require physical interaction between the borrower and the lender. The borrower may obtain private identification details of another person and falsely represent himself as that person. This can have serious implications. Where a borrower has not repaid the credit facility as well as the interest charged, the lender usually forwards the name of the defaulter to the Credit Reference Bureau. However, what happens when a person’s name is mistakenly forwarded? Can a claim in defamation be successful?

6.0. Privacy

1. Digital lending apps have come under fire for access of private data of borrowers such as GPS data, call logs, contact lists, and texts such as bank balance messages and bill payment receipts to determine credit worthiness. While the newly enacted Data Protection Act is a step towards the right direction, it is important that a legislation should be enacted to regulate the privacy of borrowers.

7.0. Conclusion

1. The Bill still needs a lot of fine-tuning in order to ensure it offers protection to digital borrowers. While the possibility of the Bill being passed are slim, it is imperative that Parliament enacts a legislation to cater for digital lending or amends the current legislation to regulate digital lending in Kenya.

If you have any query regarding the same, please do not hesitate to contact Ambrose Waigwa at ambrose@wamaeallen.com. Note that this alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.

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Wamae Allen

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