Banks and digital lenders will have to reassess borrowers’ financial capacity before increasing their loan limits under draft rules aimed at curbing predatory lending.
Financial regulators, including the Central Bank of Kenya (CBK) and the Sacco regulator, say lenders must evaluate borrowers’ income, expenses and assets afresh before upgrading loan limits.
Currently, banks and digital lenders increase borrowers’ limits based on repayment of previous loans, without assessing their ability to service new facilities.
Regulators say this practice has saddled both banked and unbanked borrowers with costly, mounting debt.
Tighter rules
‘A Financial Service Provider (FSP) shall not provide a credit product, or an increase in an existing loan or credit limit, to a retail consumer unless they have first undertaken a reasonable assessment to confirm – the retail consumer’s ability to repay the credit without financial hardship and that the credit is likely to be suitable in meeting the retail consumer’s needs and objectives in relation to credit,’ say the draft consumer regulations.
‘An FSP shall take reasonable steps to obtain appropriately reliable information about the retail consumer’s financial capability, including, without limitation, the consumer’s income, expenses, assets and other financial liabilities and commitments,’ the regulations add.
Banks have stepped up the supply of digital loans, with customers able to access up to Sh3 million via mobile applications, often in less than five minutes.
By offering quick, collateral-free credit to largely unbanked populations, digital lenders have expanded access to finance for needs ranging from medical bills and school fees to business capital.
Credit boom
Economists have hailed this growth for boosting financial inclusion in a country where only about 40 percent of people have a bank account. However, customers and digital rights groups have accused some lenders of using unethical practices to profit from vulnerable borrowers.
With mobile penetration rising, a wave of fintech start-ups has emerged to tap demand for credit among low-income Kenyans who lack formal employment, collateral or guarantors.
Hundreds of digital lenders operate in Kenya – some backed by Silicon Valley and Chinese investors – and are available on platforms such as the App Store and Google Play.
Using machine learning algorithms, these apps assess borrowers’ creditworthiness by scanning personal data on their phones, including contacts, mobile money transactions, social media activity and web history.
Easy credit
This approach has enabled lenders to raise borrowers’ limits without conducting fresh assessments of their financial health.
Within minutes, loans – ranging from Sh500 to Sh500,000 – are disbursed directly to mobile money accounts.
Demand for such loans has surged.
NCBA Group, which hosts Fuliza and M-Shwari in partnership with Safaricom, disbursed Sh1.34 trillion through the two platforms last year.
KCB Group reported a 30 percent increase in digital loans to Sh544 billion, while Equity Group said 88.4 percent of its credit was issued through digital channels, underscoring the shift away from branch-based lending.
Debt risks
‘The rapid expansion of digital credit has raised concerns about over-indebtedness and consumer protection, as many borrowers take on multiple short-term loans for consumption without adequate safeguards,’ said CBK.
Digital lenders remain popular due to ease of access and speed of disbursement.
Many do not conduct background checks with credit reference bureaus, creating a back door for borrowers blacklisted by banks, Saccos and microfinance institutions.
Digital credit providers (DCPs) do not require collateral but rely on mobile money usage patterns to determine loan limits, which are then increased based on repayment history.
CBK data shows that 16.6 percent of borrowers as of September last year were over-indebted, meaning they had more debt than they could repay.
The regulator aims to cut over-indebtedness by 30 percent over the next three years through the proposed rules.
Relief measures
Under the draft regulations, lenders will also be required to support distressed borrowers, including offering repayment holidays and restructuring loans before resorting to asset recovery or guarantor enforcement.
‘FSPs shall act promptly to offer reasonable assistance to retail consumers showing signs of difficulty in making their repayments, to help prevent their situation from deteriorating where this is possible,’ the draft states.
‘Before taking any enforcement action, FSPs shall consider and propose potential assistance appropriate to the consumer’s circumstances.’
The banking sector’s default rate stood at 15.6 percent in March, improving from 17.6 percent at the end of June. Saccos recorded 10.6 percent non-performing loans as of end-2024, above the global benchmark of five percent.
Digital credit providers had the highest default rate at 40 percent, according to CBK, signalling gaps in assessing borrowers’ ability to repay.