The Swahili people have a proverb, “nazi mbovu harabu ya nzima” that easily translates to a “a rotten coconut spoils the good ones”. The digital lending industry in Kenya is suffering the same fate as the good coconuts as negative stories of client harassment have sparked an onslaught by regulative forces.
Recent reports in the media would have you think the industry has lost direction and the time is appropriate for regulatory intervention. Yet, it is worth highlighting that in the shade of negative stories, responsible initiatives have already taken place and the industry’s representatives associated in the Digital Lenders Association of Kenya (DLAK) are willing to go to great lengths to participate in professionalization of the industry. The process, however, is a long-term initiative and requires all parties’ engagement.
DLAK knows that a long journey starts with one step, and the creation of a Code of Conduct to guide the activities of digital lenders was the first action towards a professional and standardized industry. Under this code, market players implement and follow ethical guidelines on harvesting and using customer data, presenting interest rates in a transparent and comprehensible way or collecting debts in a customer-friendly manner.
Apart from the DLAK’s code, competitive forces within the lending industry have resulted in innovative ways that enhance the relationship between lenders and borrowers. For example, Tala, the leading non-banking mobile lender, uses a customer scorecard to determine the rate at which it gives loans to its clients. The strategy ensures customers get rewarded for financial discipline by getting lower interest rates once they demonstrate fidelity to the loan terms. Zenka, gives customers a more extended repayment period to help customers repay with ease and avoid getting listed on credit bureaus.
Clients in arrears are offered customized repayment plans, enabling them to pay off their debts in convenient monthly installments. Other lenders have experimented with different offerings to customers, ranging from USSD lending to partial repayments that suit the financial situations for borrowers.
Despite the number of initiatives promoting responsible and ethical standards among leading lenders, weeding out the hostile lenders who do not stop at anything to force their clients to repay loans requires further collective effort. If the goals of the self-regulator are anything to go by, the outlook for digital lending looks safe, as the body keeps on pushing on the professionalization of the industry. The gathering of responsible lenders under the DLAK umbrella, creating the Code of Conduct, and undertaking measures to promote ethical debt collection standards are just the first steps in the process.
Further consumer-oriented initiatives derived from financially developed markets are promoted by the association, with the focus on the customer ombudsman’s office as a stand-alone, independent instance enabling faster transmission and processing of customer complaints. These measures have been successful in countries like India where digital lending has taken strong roots among the country’s unbanked.
The existence of alternative lending dates back in time, and the digital lending industry is an offshoot of traditional credit sources that included friends, workmates and relatives. There are extra benefits to using digital services to access credit as they are not only instant and efficient, but they also increase the opportunities of accessing money for small and family business owners. Once properly regulated, this form of capital may be one of the crucial factors influencing the dynamics of the country’s economy. Take the case of Meshack, a vegetable and fruits seller in Githurai market. He lost his stock to theft one day in July 2019 and a mobile loan was his only chance to restock and continue his business. Without such an option he would be left without any financial support, as no bank would have accepted to grant him a loan to revive his business.
Tales like Meshack’s are common and they capture the market gap that digital lending has filled in the last five years. Among the benefits of digital lending is the fact that customers do not have to process piles of paperwork to access loans, especially considering the little amounts involved.
The most urgent issue is the introduction of the ethical debt collection process guideline. DLAK has attempted to encourage members to approach debt collection from a customer perspective by creating a method focused on offering adaptable solutions that help customers settle their outstanding commitments.