CBK must rein in online lenders that threaten economy

In November of 2022, the Central Bank of Kenya (CBK) rolled out a debt relief plan which discounted 50 percent of consumers’ non-performing loan debts, which were overdue as per an adverse Credit Reference Bureau (CRB) listing as of the end of October 2022.

The CBK indicated that the total value of these overdue loans was Sh30 billion.

Read: Digital loan defaulters to get notice before CRB listing

At the time, we were sceptical that many of the 4.2 million consumers and small businesses blacklisted would actually receive debt relief.

Social networks remain heavily populated with posts from debt-distressed consumers seeking help.

The government’s strategy to provide debt relief by discounting debt was inadequate and doomed to fail because it did not address the underlying financial consumer protection gaps in Kenya.

First, many of the digital lenders are prima facie predatory: they are offering unaffordable, short-term loans which they know desperate consumers cannot repay.

Further, Kenyan consumers lack access to meaningful debt relief when they fall into debt distress due to many reasons.

Then, there are many illegal lenders who are advertising on social networks with impunity. Kenyan regulators need to intervene on social networks and require social networks to police their own space.

There are various natural language apps that can be modified for this purpose as demonstrated by Research by the Financial Sector Deepening Trust in 2019.

The government should also consider other, stronger policy actions such as informing consumers that loans taken from unlicensed lenders do not have to be repaid.

These loan apps are violating the law. This will discourage them.

There is a need to end the debt collection abuses by Kenya providing consumers with an affirmative right of action against those who violate their data privacy rights.

In the US, consumers who demonstrate that the lender or its agent has violated the law can obtain statutory damages and substantial sums for any emotional distress caused.

The time is ripe to ensure that licensed lenders do a proper credit risk assessment. If lenders have high default rates, as evidenced by the more than 19 million Kenyans who are overindebted (by definition a negative CRB listing means the consumer cannot service his or her debts), then lending is predatory by definition.

Read: CBK licensing unlocks funding nightmare for digital lenders

It behoves the State to provide a mechanism for consumers to have a true ‘fresh start’ through expedited insolvency or bankruptcy.

Kenya’s current bankruptcy law does not allow for a poor consumer with only debt to ever have debt relief by law. For the sake of Kenyan consumers, we hope that Kenyan policymakers recognise that economic growth cannot be founded on the quicksand that is digital debt.

The writer is the executive director of the Global Alliance for Legal Aid, which was supported by DLA Piper affiliate firm, IKM Advocates, to publish a narrative report on Kenya’s debt policy.