Digital lenders and PricewaterhouseCoopers (PWC) have released a comparative study indicating Kenya needs a consumer-centric regulatory framework to protect consumers and support the growth of digital lending business.
Under this proposed regulatory regime, all non-deposit-taking providers of credit to the public, regardless of their business model, would be bound by a set of consumer protection principles.
“A more appropriate regulatory model would be one that enhances consumer protection through regulation of the conduct of credit providers over the digital lending platforms. This can be achieved through the development and enactment of a consumer credit code that embeds the principles of consumer protection in lending,” according to the white paper,” said Digital Lenders Association of Kenya (DLAK) chairman Kevin Mutiso.
Among key consumer protection principles to be embedded in the recommended consumer credit code include transparency and fairness in dealings with consumers, transparent pricing principles, disclosure of key terms and conditions, and restrictions on certain debt collection practices. Others are credit information reporting, marketing guidelines for consumer credit products, complaints handling and dispute resolution.
All consumer credit providers will therefore be required to be registered not necessarily licensed with a relevant regulator to make it easier to monitor conduct and take enforcement measures in the event of violation of the code.
The paper proposed enforcement of the consumer credit code should be vested in a regulator, which may be the Central Bank or another agency with a strong consumer protection mandate like the Competition Authority of Kenya.
“It is our view that the CBK, having been mandated with the regulation of non-bank financial lenders, should take an approach focused on the protection of the consumer, rather than financial regulation of the lenders. As such, regulation of the conduct of the market players, with a view to protecting the consumers, should be the primary focus of the CBK,” said PwC Associate Director and Head of Regulatory Compliance Joe Githaiga.
The paper ruled out prescribing of a prudential licensing framework because it would increase the compliance burden for lenders, the costs of credit for consumers and monitoring burden for the regulator.
According to the DLAK report, stringent rules on minimum capital requirements, financial adequacy, and reporting, local shareholding requirements and so on, would impose significant compliance costs on participants.
Majority of unregulated digital lenders in Kenya are start-ups, funded by shareholder/investor funds and onerous compliance costs is deemed would affect the viability of these entities and they may not survive over the longer term, which would in turn stifle innovation and rob consumers of their products a convenient and reliable means of accessing finance.
“While we are comfortable that our recommended regulatory model would strike the appropriate balance between promoting innovation and protecting consumers, we acknowledge that further detailed consultations with a broad range of stakeholders (Parliament, National Treasury, Central Bank, DLAK, Consumer Federation of Kenya (“COFEK”) and the wider public) would need to be conducted before a decision can be made regarding the final regulatory model to be adopted,” Mr. Githaiga added.
The findings follow a comparative study on digital lending across 11 jurisdictions with different regulatory regimes.
The study reviewed a number of literature including primary legislation and the applicable subsidiary and ancillary legislation supporting the digital lending regulatory framework in Australia, Egypt, Uganda, India, Mexico, Nigeria, Poland, South Africa, Spain, United Kingdom, and Singapore.
Based on the DLAK analysis, most countries were found to regulate digital lenders under one or more regulatory regimes, broadly focusing on consumer credit and finance.
Australian and South African lenders are supervised under national consumer credit laws while in Egypt, Uganda, and Singapore supervision is done under microfinance or moneylending laws.
For UK, Poland, Mexico, and Spain, supervision is under financial conduct or consumer protection laws as India and Nigeria leverages general consumer finance laws to supervise digital lenders.