Tough Digital Lending Laws Force Debt Collection Agencies Out of Business

These agencies were attracted by the high commissions available and the growth in digital lending was driven by the high demand for easy loans that didn't require collateral or extensive paperwork. At one point, digital loans made up a large percentage of the debt collection agencies business.

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Loan Apps Kenya

This week, we extensively discussed the state of digital lending apps in Kenya, and the consensus is that the companies behind online loan apps are not having it easy following the institution of a number of laws that were long due, and which appear to be doing great work in taming their previously unlawful practices, such as aggressive debt collection practices and blatant abuse of personal customer data.

For some context, locally, debt collectors for digital lenders are typically third-party companies that are contracted by the lenders to recover unpaid loans. These collectors may use a variety of methods to contact and negotiate with borrowers, such as phone calls, email, and SMS. Some digital lenders in Kenya also have in-house collections teams. This, however, was merely theoretical to these companies because they used all means at their disposal to recover loans, including threats and debt-shaming tactics such as calling a borrower’s relative to compel them to pay.

As digital lending in Kenya grew, so did the number of debt collection agencies. These agencies were attracted by the high commissions available and the growth in digital lending was driven by the high demand for easy loans that didn’t require collateral or extensive paperwork. At one point, digital loans made up a large percentage of the debt collection agencies business.

Now, according to a report published by Smart Business and amplified by the Nation, the growth in debt collection agencies and their high earnings from commissions have come to an end. This is because digital lenders, who are now more cautious, have ended their relationships with outsourced agents following new strict regulations from the Central Bank of Kenya (CBK). These regulations were put in place, in part, to curb unethical debt collection practices.

According to an official from a debt collection agency, all major digital lenders have ended their contracts with debt collection agents as a precautionary measure to avoid breaking the law. This is because of the Digital Credit Providers Regulations, 2021, which have a significant impact on debt collection strategies, and now all digital lenders want to have full control of their operations.

The law also complements the CBK Amendment Bill, 2021, which further instituted stringent regulations for digital lenders.

To reiterate the previous story, here are a few things that have developed so far.

  1. Only 10 digital lenders have been approved to run their operations in the country.
  2. More than 278 digital loan apps are yet to be approved.
  3. The CBK may be experiencing a challenge in approving them because the law requires lenders to submit hundreds of pages in compliance text.
  4. The delay in issuing licenses is forcing some lenders to go under.
  5. Some lenders are also not receiving funding from investors because they cannot operate due to the delayed issuance of licenses by CBK.
  6. Google has also suspended a ton of local loan apps that have to put in place privacy measures for their customers.

Looking at these developments, the borrower is the biggest beneficiary.

Now, lenders must comply with the said laws when collecting debts electronically. This includes not sending harassing or threatening messages, not disclosing the debt to third parties, and providing the debtor with certain information about the debt, such as the amount owed and the name of the original creditor.

However, will this be good for borrowers in the long run? Probably yes, and no. Online lending has been here for a while, and with these new laws in place, it will be tougher for lenders to recover their loans from high-risk borrowers.

For instance, the interest rate for high-risk loans is typically higher than that of low-risk loans because the lender is taking on a greater level of risk. This is due to the fact that borrowers with poor credit or a lack of collateral are considered to be more likely to default on their loans. The exact interest rate will vary depending on the lender and the specific loan, but it can be significantly higher than the rate for a low-risk loan, and lenders such as Equity have already started implementing this measure.

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Kenn Abuya is a friend of technology, with bias in enterprise and mobile tech. Share your thoughts, tips and hate mail at [email protected]