Kenya has made some drastic changes to its regulations for Credit Reference Bureaus (CRBs) and Credit Information Sharing (CIS) system. Under the new regulations, over 60 unregulated digital mobile lenders such as Tala and Branch will not be allowed to forward the names of loan defaulters to Credit Reference Bureaus, while all financial institutions will not be allowed to blacklist people for loans of amounts less than Kshs 1,000.

These regulations are a big blow to digital lenders who will no longer hold sway over borrowers using the threats of listing them with CRBs.

While in practice this is a bad thing for the lending industry, it is welcome news to Kenyans. The proliferation of many digital lenders in Kenya had almost turned into a curse instead of a blessing for a few reasons. Almost half a million Kenyans are negatively listed with CRBs due to loans of KShs 200 and below!

Possible low financial literacy levels in Kenya

Financial literacy on matters to do with digital lending has often lagged behind the availability of such services. The consequence of this is that many people got to know about those services and went ahead to get loans without a clear plan on how to repay the loans.

With high levels of poverty, every coin is always welcome and some people jumped in to get the free money on offer. These people never had a plan on how to repay, even though they might have had intentions of the same. Others took the money and went into online betting. Only after they got listed with the credit reference bureaus did they realize that it would cost money to be delisted, and a clean standing with CRBs is required for job applications.

Kenya's digital lenders are aggressive

With over 60 digital lenders operating in Kenya, everyone was trying to get some market share and so the barriers to getting loans were lowered. This was an unregulated market, and some lenders could sneak into the market without a license. Due to the competition, each lender had to lower the bar in order to win users, with some encouraging people to borrow as much as possible or to repay and borrow immediately.

The service providers also embarked on aggressive marketing campaigns in order to reach more people. Capitalizing on the existing digital platforms, the vulnerable people were coerced to take loans which they found themselves unable to repay.

What Kenya's new regulations mean for digital lenders

With the new regulations, the landscape is changing.

For most digital lenders, it is time to figure out how to survive. They will need to find a way of doing some due diligence without access to CRB’s and this leaves them dangerously exposed. They also need to find a way of getting people to repay the loans without the incentive of CRB listing.

Borrowers with non-performing loans of below KShs 1000 will not be submitted to the CRBs. While this is good news for borrowers, it is a blow to lenders who offer small amounts of money. On the flip side, it will force them to do better due diligence, which means that the habit of lending irresponsibly will decrease.
People who need CRB clearance will also get it free of charge for the first time. Previously, it cost KShs 2200 to get the certificate which is only valid at the date of the issue. This has always been a problem for many young people who are required to get certificates when applying for some jobs.

But the biggest opportunity lies in helping borrowers take advantage of their credit history. This would mean that a person who has been getting loans and consistently paying on time should get a lower interest rate as they are not a risk to the lender. This could open a new frontier for digital lenders to compete, once they comply with regulatory requirements.

It could also open doors to other industries to use the data. In the future, we might have landlords not requiring tenants with a good credit history to pay rent deposits!

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