Over the last decade, technology has significantly changed how Kenyans gain access to credit.
Notably, more Kenyans are now financially included and can access short-term loans as low as Sh500 with a tap on their phones and sort out emergencies as fast as they come.
Every day, we see more Kenyans previously excluded from formal financial services being able to access affordable credit to meet their daily financial needs in education, health, food and business.
This progressive transformation has been necessitated by a growth in digital lending that continues to record a rise in the number of service providers to complement commercial banks by unlocking credit needed to power economic growth.
As we continue to experience growth in fin-tech, like a two-sided coin, we celebrate wins but also new challenges emerge.
To ensure Kenyans and the general economy reap from the growth of fin-tech, we must endeavour to foresee challenges and find effective ways of dealing with emerging issues especially around consumer protection, innovation, and competition in the digital ecosystem.
While there is an expectation for the industry to become even more professional and evolve past its start-up phase to a more mature growth phase, we need to learn several lessons from different developed countries, pick and adopt international best practices that will support the growth of digital lending and bolster financial inclusion over the next phases of growth.
Therefore, regulating the sector with appropriate rules of play becomes apparent.
The Digital Lenders Association of Kenya (DLAK) has already identified the need to implement some regulations over and above the current Code of Good Conduct, a set of rules that have been signed and implemented by all the members of DLAK.
These regulations should create a level market environment to help both traditional and digital lenders play a complementary role to ensure small business owners and consumers’ access to credit and other more diverse products that could be introduced to the market for the benefit of consumers and service providers.
The United Kingdom and the United States of America markets can offer us a better view of the regulatory framework that Kenya can adapt and customize for the developing market.
In the United Kingdom, which is considered to have Europe’s most developed financial market and one of the biggest hubs for financial innovation globally the Financial Conduct Authority (FCA) regulates among other non-bank lenders and digital financial providers.
It is worth noting that the FCA was established back in 2013 during a makeover of the financial system regulatory framework that was executed by legislators as a way to cope with the challenges of the 21st century and the digital disruption taking place in the financial market.
FCA’s key roles include protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers.
It may be contended that such capital necessities dictate that digital lenders function discreetly in managing commercial and financial risks.
A big lesson that Kenya can learn and emulate from FCA and the UK government is their supportive role in the promotion of financial innovation with a pro-business approach that has nurtured innovation and more competition in the UK financial sector.
This progressive decision has increased access to financial services and put pressure on old incumbent players to start innovating and offering better services to consumers.
For instance, the rise of fintech like Revolut and Monzo, which have gained unicorn status (that is businesses valued at more than $1 billion) are well funded and are expanding globally is a key testament of what government and regulatory support can do when the right strategy is in place.
Earlier in the year, San Francisco-based Square Inc. received conditional approval to create a business bank from the Federal Deposit Insurance Corporation and is expected to launch banking services in 2021.
Another fintech pioneer operating in the peer-to-peer lending space, Lending Club, purchased Radius Financial institution for Sh 18.5 Billion partly to achieve a national bank charter.
This October, US payments fintech – Stripe, acquired Nigerian payments start-up Paystack in a deal valued at $200 Million to underscore the potential of African start-ups’ contribution to financial inclusion of the unbanked segment of the population.
This is proof of the fundamental role that fintech play in permitting access to credit and payments, an occupation that was traditionally dominated by banks.
A competitive lending market can potentially lower the costs of scoring and disbursing loans to lenders, and help borrowers access more affordable credit. A key feature of digital credit is generating credit scores from digitized financial transactions.
Research has identified that underprivileged people who wish to acquire loans are unable to effectively deal with income jolts. Digital lenders become very useful in such occurrences of shocks since loans can be made remotely and instantaneously, with no need for human mediation.
In the past several years, digital lending has swiftly flourished in the developing world, particularly in Sub-Saharan Africa and South-East Asia.
Digital lending proposes numerous substantial enhancements relative to traditional credit, conspicuously access to loans for underbanked SMEs and retail clients, hassle-free loan approval and payout process, and an extension in the consumer base resulting from using non-traditional records to create credit scores.
We understand that coming up with progressive regulations is not a day’s job, which is why we encourage an all-inclusive engagement moving forward to help address grey areas and bottlenecks that may impact negatively on the growth of the sector.
A good regulatory framework should be one that facilitates growth, resolves uncertainty between the individual roles played by banking and telecom regulatory authorities.
The biggest test for legislators will be finding the balance and determining what should come first to foster the growth of this transformative sector.
Digital lenders are backing regulations that follow innovation to ensure that we come up with progressive regulations that address issues as they emerge.