In response to a boom in predatory lending practices, Kenya’s Central Bank and Indonesia’s Financial Services Authority (OJK) have proposed to introduce new regulations to rein in unscrupulous P2P lenders from preying on the unbanked and underbanked population.
The Kenyan Central Bank and Finance Ministry have jointly issued a draft bill for public review and commentary before it becomes codified into law in June. The bill itself contains far-reaching clauses, such as the establishment of a new Financial Markets Authority of which will be tasked with implementing interest rate caps for digital lenders. Digital lenders will have to be licensed by the new body in order to continue operating within Kenya. Indonesia has also announced that it will be rolling out its own set of digital lending regulations, citing the danger of flourishing ‘loan sharks’ as the most compelling reason. Although the OJK has no plans to cap interest rates, it will be capping the maximum amount lendable (per individual) from P2P sources, imposing minimum core capital requirements and mandate similar registration procedures.
In recent years; fintechs and more specifically, P2P lending platforms have become a key element of financial inclusion narratives in developing countries. A combination of low literacy and large informal economies have led to large swathes of the farming and working class population shut out from important and essential banking services. Mobile based P2P lending platforms were seen as an accessible source of credit compared to traditional banks, which shunned applicants lacking in formal collateral and paperwork. High mobile penetration rates also meant that mobile phones could serve as an alternative point of access for many who did not live near a physical bank branch. However, the lack of existing regulation meant that many of these foreign owned platforms could operate beyond the reaches of legal scrutiny. Digital lenders offered high accessibility and high loan approval rates, often with equally high interest rates.