The consumer credit market in Kenya has been characterised by extremes in recent years. On the one end of the lending spectrum are the country’s banks, whose lending appetite towards consumers could be described as constrained given the legal limits imposed on their lending rates. The Banking Amendment Act of 2016 capped the interest that banks and other financial institutions may charge at four percentage points above the Central Bank of Kenya rate (currently 9.5%). On the other end of the spectrum are a host of FinTech companies, including mobile money service providers, microfinance providers, traditional banks and online lenders, who leverage technology to deliver a variety of credit services.
Popular technology enabled credit services include Branch, M-Shwari, Tala, Utunzi, Stawika and Haraka. Unencumbered by any caps on their lending rates – or by any other form of credit regulation for that matter – FinTech companies have been enthusiastically filling the credit gap in the market, and have contributed to improved access to credit in the Kenyan market six fold between 2010 and 2016. These two extremes are reflected in the range of interest rates that consumers have been paying for credit, varying from a relatively modest 13.5% to 700% in some cases.
Loans offered by the FinTech companies range from between USD 10 to USD 500, and an individual’s access to credit is determined by assessing various data points as proxies for traditional financial data. Data points commonly analysed by FinTech companies include texts and calls, payment transactions, data usage, social network data and location data, among others. The uptake of loans by consumers has been high; for example, Tala reports it has granted more than six million loans worth more than USD 300 million, mainly in Kenya, since it launched in the country in 2014. The loans disbursed have been a key driver for growth, with the majority of funds being used by individuals to start or grow small-to-micro businesses and to meet household expenses. However, over time, social concerns have arisen, necessitating Government intervention aimed at ensuring that retail credit customers are treated fairly.
The flip side of the FinTech coin
The digital loan products available have not improved livelihoods, according to a joint survey conducted by the non-state financial inclusion agency, Financial Sector Deepening (‘FSD’) Kenya, the Central Bank of Kenya, the Kenya National Bureau of Statistics and the Consultative Group to Assist the Poor. The concerns raised include not only the wide range of interest rates highlighted above, but also practices that burden customers in other ways, negating the gains made by increased access to credit. Such burdens include an inordinate number of individuals being listed with credit reference bureaus on default of nominal sums, thereby restricting further access to credit, and poor debt assessment, resulting in individuals being granted loans they have no way of paying back.
The prevailing concern of the National Treasury has been that in the absence of effective regulation, FinTech lending could undermine the gains made as a result of mobile payments, which is credited with increasing financial inclusion in Kenya to over the global average of 65%. This has set the scene for the drafting of one of the most far-reaching pieces of legislation yet in the financial sector in Kenya – the Financial Markets Conduct Bill of 2018.
New Bill rings in credit market changes
In late May 2018, the National Treasury (the Government Ministry which formulates financial and economic policies and oversees effective coordination), published the Financial Markets Conduct Bill 2018, which will apply to virtually all players in the financial services space, including mobile money and microfinance lenders.
In a notice announcing the publication of the Bill and calling for public comments, Dr Kamau Thugge, Principal Secretary at the National Treasury, commented that the Government recognises that a competitive and well-functioning retail and financial sector is vital to the economy. In this regard, the National Treasury has reviewed the challenges around consumer credit and market conduct in Kenya. “The draft Bill aims at creating effective financial consumer protection, making credit more accessible and at the same time supports financial innovation and competition,” said Dr Thugge. It will do so by providing a “uniform set of practices and standards for the supervision and conduct of providers of retail financial services based on international best practice.”
What is particularly interesting about this development is that the National Treasury appears to have signalled its intention to finalise the Financial Markets Conduct Bill sooner rather than later. The Bill was published on 22 May 2018 and the closing date for individuals, organisations and institutions to submit their written comments was 5 June 2018. Of course, this is by no means the end of the public participation process around the Bill but the two week window given for the first round of comments is relatively quick, perhaps indicating the serious light in which the Government views the current challenges in the consumer credit market in particular.
Indeed, reports of some providers charging exorbitant interest rates are a cause for concern. So too is the lackluster growth of private sector credit and the general credit crunch in Kenya, which has worsened since the Banking Amendment Act was passed, curbing bank interest rates and their willingness to lend in the higher risk consumer market. This explains the multiple objectives of the draft Financial Markets Conduct Bill, which will apply to all retail credit providers, as well as all other providers of retail financial products and services.
The Bill defines a ‘financial product’ as a facility or arrangement through which a person makes a financial investment, mitigates a financial risk or makes a non-cash payment. A ‘financial service’ is defined as the provision of credit and credit services, the administration of financial products and services, the provision of financial advice or the engagement in any conduct as may be prescribed in regulations.
Clearly, the ambit of the Bill is extremely broad, encompassing the entire retail financial sector and bringing all delivery channels, regardless of the technology used, under the regulatory net. This technology agnosticism is not explicitly stated but the definitions of financial products, services and service providers certainly appear to be wide enough to cover digital credit providers and mobile lenders. The emphasis placed on the provision of a ‘uniform’ set of practices and standards for all players in the financial services sector further underlines the inclusiveness of the upcoming changes.
Broad scope, powerful regulators
The Financial Markets Conduct Bill also ushers in a new regulatory framework and no fewer than four new regulatory bodies: the Financial Markets Conduct Authority, the Financial Sector Ombudsman, the Conduct Compensation Fund Board and the Financial Services Tribunal.
Key among these will be the Financial Markets Conduct Authority, to which all providers of financial products and services will have to apply for a financial conduct licence. The Authority will be authorised to set maximum interest rates that lenders will not be allowed to exceed. Should they do so, they will be committing an offence, the penalty for which is steep. First offenders that levy prohibited charges, or operate without a licence, will be liable for a fine of KS 5,000,000 (approximately USD 50,000) or sentenced to a two year period of imprisonment. For second and subsequent offences, the penalty is KS 10,000,000 (approximately USD 100,000) or imprisonment for up to five years.
Other prohibited practices that will attract equally steep penalties are varying the terms of credit or increasing credit limits without ensuring the customer or guarantor is able to repay the credit, reckless lending, accepting a reckless guarantee and failing to issue a pre-contract statement and quotation to a customer before entering into a credit agreement. The Bill also prohibits lenders from soliciting credit applications, requires that lenders give borrowers reasons where they decline to lend, and compels lenders to use plain language when communicating interest rates to a customer or guarantor.
Notably, the Financial Markets Conduct Authority will, in consultation with the Cabinet Secretary for Finance, have the power to prescribe regulations imposing a levy on providers of financial products and services. This will be an annual levy, payable within 30 days of receipt of an assessment from the Financial Markets Conduct Authority and will largely be used to fund the Authority itself, the Ombudsman and the Conduct Compensation Fund Board. The penalty for failing to pay the required levy is KS 5,000,000 – a sizeable amount.
Mixed reaction
The deadline for public comment on the new Bill has only recently come and gone and, at the time of writing, it is not yet known how many submissions the call for public comment attracted, or what aspects of the Bill received the most attention.
However, a certain amount of commentary has been aired in the media – notably the response of the Central Bank of Kenya. At a press conference reported on by Reuters, the Governor of the Bank, Dr Patrick Njoroge, expressed reservations about the Financial Markets Conduct Bill. Dr Njoroge was reported as saying that the Central Bank was under attack via the Bill, which would curb its ability to regulate fees and charges and deal with reckless lending.
At this early stage of the legislative process, it is difficult to predict how the establishment of the Financial Markets Conduct Authority would affect the powers of the Central Bank. It is worth noting, however, that the new Authority would be managed by a board of nine members, one of whom would be the Governor of the Central Bank. Almost all the other members would be appointed by the Cabinet Secretary, who would also be a member of the board.
In another publicly aired comment, the Cytonn investment fund said in a Report that private sector credit growth has been declining since September 2016, when the cap on bank interest rates was introduced, and that the advent of the Financial Markets Conduct Bill will not resolve the country’s consumer credit crunch.
To quote the Cytonn Report: “The Bill has partly addressed its intended purpose, i.e. consumer protection, but has not addressed the issue of the interest rate cap, and has clashed with the Central Bank of Kenya’s constitutional mandate and provisions of the Banking Act.”
The Report emphasises that the Bill as it stands fails to address the problem of access to credit. “With the [bank interest rate] cap still in place and should the Bill be enacted, two boxes will be checked, i.e. loans will appear cheaper […] and retail customers will be protected from exploitation by lenders. However, we are of the view that more still needs to be done to address the fact that banks will most likely still prefer to lend to the risk-free government as opposed to lending to a riskier retail customer at the current 13.5 percent.”
FinTech companies, on the other hand, are likely to be wondering if and how they will be able to meet all the requirements of the Financial Markets Conduct Bill if passed in its current form, and what impact the legislation could have on their businesses.
Implications for FinTech
There is no doubt that credit lending is a risky market, as was confirmed in an FSD Kenya assessment of the digital credit revolution in the country. In a survey released in March 2018, the FSD reported that almost half of digital borrowers surveyed said they had been late in repaying their loans. Some 14% said they were repaying multiple digital loans.
It could be said that the high interest rates some FinTech lenders charge are commensurate with the risk they shoulder. There is also the possibility that some consumers would rather pay a higher interest rate if the alternative is having no access to credit at all. Will the proposed Financial Markets Conduct Authority take such factors into account when setting the maximum interest rates that lenders can charge?
Another potential concern for FinTech companies would likely be the cost of licensing with the Authority and the annual levies that would be payable (the Bill does not provide any details on this). For businesses with lean overheads, these could be make or break expenses.
Then there is the question of their capacity to comply with the many proposed administrative requirements that seem likely to be extended to FinTech players, including the necessity for a raft of documentation and new business processes. Forcing FinTech companies to start behaving like traditional lenders could dramatically push up their costs of doing business and blunt their competitive edge – thus potentially defeating the Government’s objective of promoting accessible lending.
In a business of extremes, where the players range from established, traditional lenders to agile, technology driven FinTechs, the one size fits all approach proposed in the Financial Markets Conduct Bill could squeeze rather than expand credit supply in Kenya. Hopefully, the Government will ensure enough time and thought is given to debating, developing and refining the Bill to accommodate the complexities and intricacies of the market.
