Kenya’s digital lenders have responded to regulatory changes by raising the minimum loan amount to above Sh1,000. This adjustment comes in light of new regulations from the Central Bank of Kenya (CBK), which prohibit the negative listing of defaulters on small mobile phone loans.
The decision to raise the minimum loan value stems from concerns over high default rates on loans below Sh1,000. In order to comply with CBK regulations, lenders have increased the minimum loan amount to enable them to report defaulters to the credit reference bureaus (CRBs).
Kevin Mutiso, chairperson at DFSAK, emphasized the clarity of the law in this regard, stating, “The law is very clear that amounts below Sh1,000 cannot be reported, so the limit for most of our loans is now closer to Sh2,000. We are very strict on the type of customers we give loans to nowadays.”
The Digital Financial Services Association of Kenya (DFSAK) has been instrumental in guiding its members through the CBK’s Digital Credit Providers Regulations for 2022. These regulations, among other things, explicitly forbid the listing of defaulters with debts below Sh1,000.
This move has resulted in a shift in lending patterns, with borrowers who used to access smaller loans of around Sh500 now facing increased minimums. The association sees the threat of CRB listing as a motivation for loan repayment.
Digital Lenders Protecting Themselves
The CBK has licensed 32 digital credit providers, and these entities are bound by the regulations, which also prohibit the use of obscene or profane language and unauthorized or unsolicited calls or messages when attempting to recover defaulted loans.
Only last week, the Office of the Data Protection Commissioner (ODPC) heavily fined a digital lender for harassing borrowers.
DFSAK, formerly known as the Digital Lenders Association of Kenya, has found that 55.5 per cent of borrowers use loans to boost the working capital of small businesses, while 24.8 per cent use them to cover unexpected expenses. Another 13 per cent use loans to pay school fees.
The digital lending industry has been focused on protecting itself from high default rates, especially since the CBK’s decision to block the listing of defaulters with CRBs due to the misuse of credit information platforms. This shift in lending practices aims to strike a balance between regulatory compliance and financial stability.