A decade later, how can policy support consumer protection and competition in Kenya’s digital credit market?
Ninette Mwarania, Rafe Mazer, Daniel Putman and Willie Blackmon
In the eight years to 2020, the digital credit sector in the country has experienced significant growth. Indeed, the Central Bank of Kenya’s Banking Sector Innovation Survey indicated that 79% and 72% of all banks and microfinance institutions banks had introduced new financial technology (FinTech) products into the market, respectively.[1]
Such growth, where new entrants, both local and foreign-owned, find space to operate and prosper in an indication of consumer acceptability and accessibility, and that the market is also contestable and has low barriers to entry. However, the proliferation of FinTech products has occasioned competition and consumer welfare concerns which need to be urgently addressed to ensure consumers maximize their benefits from these products. In the same breath, interventions aimed at correcting the prevailing issues need to be facilitative to innovators’ growth.
In Kenya some of the most critical competition and consumer protection risks resident in this sector include the high cost of products which when coupled with multiple borrowing per user leads to debt stress. There is also a dearth of consumer awareness about the terms attached to the products and services they consume, including the applicable fees and charges as well as the penalties for non-adherence to the terms and conditions of the products. Other concerns include a high dependence by digital lenders on telecommunications/big-tech firms to access customers, payments channels and data used for loan appraisals and disbursement.
Figure 1: A new overdraft loan quickly became the top digital credit product just months after launching in 2019
In order to better understand these challenges and other risks in the regulated and unregulated digital credit markets, the Competition Authority of Kenya (CAK) and the Innovations for Poverty Action (IPA) conducted an inquiry in FY 2020/21.
The Study set out to identify and address potential consumer protection concerns in the regulated and unregulated digital credit markets in Kenya. A total of 793 digital financial services users across Kenya were surveyed. Additionally, we requested and received aggregated data from bank and non-bank digital lenders. We posit that the insights/findings from this inquiry, if considered keenly by policy makers, financial institutions and other relevant stakeholders, could help alleviate the issues currently facing Kenyans using these FinTech products.
Insight 1: Need for modern information-sharing to drive choice and competition
The Survey indicated that 33% of digital credit users had multiple active digital loans prior to the first case of COVID-19 being reported in Kenya on March 16th, 2020 in Kenya. The most common reasons given for operating numerous loan accounts was that the respondents needed to attend to emergencies (52%) and that the products had low loan limits (35%) and therefore they needed to supplement.
The administrative data we assessed from the lenders indicated that these borrowers often requested for several loans within a significantly short period. Indeed, 96% of these individuals with loans from multiple providers usually borrowed them within 30 days of each other.
It was also notable that individuals who have multiple loans from several providers (cross-provider borrowers) were at a higher risk of defaulting on their obligations as opposed to individuals who procure multiple loans from one provider.
At present, non-bank digital lenders are not legally required to submit reports to credit reference bureaus (CRBs). However, commercial banks submit these reports on a monthly basis. In our assessment, monthly reportage is too long a spread to facilitate accurate assessment of multiple borrowing behavior being observed in this very dynamic market.
To remedy this situation, the Study recommends adoption of a daily reporting credit information system. Such a system would require bank and non-bank lenders to adopt mechanisms of lending to repeat borrowers when they are “overstretched”, and allow repeat borrowers with facilities from one provider to seek competing offers from competing lenders who have equal visibility into the borrower’s positive repayment history.
In addition, the inclusion of mobile money and historical payment data would provide valuable cash-flow information for lenders to better assess the risk profile of new borrowers, and ensure that products such as mobile money overdrafts are reflected in a consumer’s credit history reports.
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Figure 3: Digital loans are paid before 30 days |
Insight 2. Pricing should reward good borrowers
Secondly, analysis of the administrative data revealed that 4% of all borrowers in the sample fully paid their loan within 24 hours of securing them. These frequent borrowers more often than not borrow from a single lender. However, one provider in the sample indicated that more than 50% of their borrowers applied for and received five or more loans over the 15-month sample period. By maintaining a culture of prompt and full repayment as well as regular borrowing, these consumers prove their credit worthiness. As a consequence, some lenders reduced their applicable interest rates on subsequent loans. From the foregoing, it is clear that if lenders were to refund a portion of the fees/charges to borrowers who fully honor their obligations before the due date, and if they were to reduce the charges applicable to repeat borrowers of good standing, then the cost of borrowing would reduce significantly for many frequent users of digital credit.
Insight 3: New reporting requirements will help policymaking better keep apace with innovation
While our analysis identified policy priorities which reflect the current realities of the digital credit market in Kenya, were remain alive to the fact that this market is highly evolving and the dynamics could be different in a few years. Put differently, the Policy remedies/interventions applied today may not accurately reflect the needs of tomorrow’s consumer protection and competition priorities.
Having noted that, we posit that the following Policy interventions may be particularly useful in ameliorating the consumer and competition concerns resident in this very important sector;
- Leverage demand-side data collection tools like phone surveys and complaints data for gaining periodic consumer insights. Random-digit-dial phone surveys offer a relatively low-cost, fast way to collect consumer insights that complement the transaction data recommended above. Similarly, reporting of complaints data could help to identify what issues consumers raise, and how this differs across different lenders, which can be used to institute remedial measures, and make innovations happen
- Develop monitoring tools to better segment at-risk consumers and measure competition. If all digital lenders were to submit account or transaction-level data to regulators, consumer protection efforts could better target the consumers who are most at risk of debt stress, therefore, lowering the default rates , and therefore, lower the default rates.
- Require reporting on fees charged and total charges to make pricing transparent. Sector regulators could collect official pricing information from providers on a monthly or semi-annual basis and publish the results. This should include not only official costs, but the actual average charges incurred by borrowers broken down by regular charges, penalties, and rollover charges.
The regulated and unregulated digital credit sector in Kenya continues to grow and evolve to serve the needs of households and small businesses. To ensure consumer protection keeps apace with innovation, new methods of market monitoring like those recommended by the Authority and IPA in the Digital Credit Market Inquiry should become permanent features of policymaking and industry supervision.
The full report may be accessed here - https://bit.ly/3bZPAf2
[1] https://www.centralbank.go.ke/uploads/banking_sector_reports/1232186390_BankingSectorInnovationSurvey2020.pdf
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