By Adano Roba & Boniface Kamiti
JUNE 30 – Kenya’s Companies Act, 2015, was meant to be a clean break from the past, a sweeping overhaul of the legal and institutional architecture governing corporate and financial conduct in the country.
Yet when the law came into force, it quietly carried forward a fault line that has gone largely unexamined. Companies already incorporated under the repealed law were never required to re-register or align themselves with the new regime. What looked like regulatory convenience at the time created a structural loophole in law.
By exempting existing entities from re-incorporation, the Companies Act inadvertently created a two-tier system where non-deposit-taking (credit-only) institutions were never brought squarely into the new compliance framework to govern their operations and conduct in Kenya.
Nowhere is this regulatory lacuna more visible than in digital lending. A wave of foreign-owned platforms, many without a local office, has expanded financial access for millions of Kenyans but often at a steep cost to consumer welfare.
To drive this home, in 2021 the Competition Authority of Kenya received a complaint from a consumer who had borrowed KES 300,000 against their vehicle logbook from a credit-only digital lending firm.
The contracted loan tenure was 24 months, at an interest rate of 10%, which translates to 120% per annuum is simple interest. The lender installed a tracker on the borrowers’ vehicle and, before the disbursement of the funds, required the customer to meet the re-insurance cost and undisclosed fees and charges.
As a consequence, the borrower received KES 200,000 of the total loan amount of KES 300,000, and commenced loan repayment without default. Five months later, and upon requesting for their loan statement, the customer realized that the outstanding amount stood at KES 500,000. This loan amount was more than the total cost of the loan, being the principal amount plus interest and fees.
Efforts by the customer to resolve the issue with the lender bore no fruits. On the contrary, the borrower was slapped with an attachment notice against the vehicle, with a false claim that the loan was non-performing. The auction was fast-tracked, raising questions about the availability and integrity of the dispute resolution mechanisms.
This is not an isolated case. In the financial year to June 2023, we attended to 180 complaints against digital lenders and microfinance institutions. This number went up by 10 the next year and the trend continues.
A critical review of these issues points to a major impediment to achieving a well-functioning financial system in a rapidly evolving business environment. If not adequately addressed, it threatens to undermine this critical sector and erode the gains made in achievement of financial inclusion to the detriment of consumers’ financial health.
Consumers often face misleading and false claims by business operators, luring them into buying products or services that do not match the marketed claim. Sometimes, for instance, the true cost of loans or the penalties for default are hidden at the time of onboarding, hoodwinking the consumer to make uninformed decisions. In the case example above, consumers face unconscionable conduct through arbitrary asset auctions and demands for payment far exceeding what was initially disclosed or reasonable, leaving them in both emotional and financial distress.
In 2018, the CAK undertook an investigation into the terms and conditions for loan contracts by micro-finance institutions. It established that the contracts contained misinformation and unconscionable clauses which infringed the rights of consumers, to information necessary to make informed decisions and choices, and hence obtain full benefits from goods and services.
This is not a privileged demand but a requirement under Article 46 of the Constitution of Kenya. To remedy the situation, the CAK directed the concerned microfinance institutions to revise or expunge the offending clauses. Investigations into more than 60 complaints against non-deposit-taking microfinance institutions further revealed that the majority related to hidden fees, predatory lending, and coercive loan-recovery practices. This places the Authority in a unique position to address the challenges consumers face in championing for good business practices.
One key concern in the digital lending space is the unsettling regulatory landscape within which these institutions operate. The proliferation of misleading digital lenders has been propelled by an ineffective legal, regulatory and supervisory framework for credit-only institutions. Consumers are paying the ultimate price.
Given the current lending landscape, regulating the practices of credit-only lending institutions, without stifling vibrant competition, should become a priority for coordinated approach among competition, data protection, and financial sector regulators.
Providing relevant, accessible and comprehensive information about financial products and services, consumer rights and obligations under the existing legislations, for achieving responsible borrowing practices, would deliver wider financial benefits to the society. Further, there is need to safeguard consumers against exploitative digital platform and forestall future borrowers from falling into the poverty trap occasioned by loan overcharges.
In seizing missed opportunities of protecting consumers in the financial services, awareness creation (education) efforts should be intensified. One such effort is the CAK’s collaborative effort with the KICD to incorporate consumer education in junior school curriculum, ensuring that our children grow up to be informed consumers. Additionally, a more nuanced regulatory framework, that seeks compliance with ethical lending standards, while promoting healthy competition, could further fortify the achieved gains.
There is need for striking a balance between healthy competition and safeguarding consumer rights is a milestone regulators would desire to attain in delivering benefits of digital credit markets. This may somewhat be a moving target for redressing consumer complaints, as small and medium enterprises on e-commerce online application also face a bitter experience.
Going forward, as the financial sector evolves and digital lending expands, the regulators should effectively confront regulatory obstacles in the emerging digital markets. This far, a strong case exists for bringing digital lending and microfinance institutions under the purview of regulatory radar by prioritizing enforcement actions, aimed at reducing consumer harm, and enhancing consumer welfare in interconnected facets of the digital market ecosystems.
Adano & Boniface, are Director Policy & Research, and Manager Consumer Protection, respectively, at the Competition Authority of Kenya.
