Following the proliferation of mobile money services, digital lending businesses have become major players in lending and other associated services. In this interview with Kevin Mutiso, Chairman of the Digital Financial Services Association of Kenya (DFSAK), Kevin discusses the evolving landscape for digital financial services, the risks, the interplay between innovation and regulation, and how the association is helping members and their customers to navigate the services on offer.
Joseph: The Digital Lenders Association of Kenya recently rebranded to Digital Financial Services Association of Kenya (DFSAK). What led to this change?
Kevin: There were about four or five digital lenders in 2013 but this has grown significantly over the years. As time went by, we started seeing consumer protection issues. These issues were being blamed on the digital lending ecosystem. We came together and decided to create two narratives. Digital lenders were split into two main categories. There were those that were mission-driven, and then there were those we call ‘land grab’. Land grab refers to those who had seen the opportunity to lend money to people and their thought process was: let us lend money at the highest rates and let us be as rough as possible with collecting. There were also mission-driven players who were trying to push for financial inclusion — they were trying to build specific demographics, bring access to credit so that those demographics could grow their businesses. Those demographics are typically the micro, small and medium enterprises.
The word digital lending now has this very negative connotation. At the association we asked ourselves: if we are to position ourselves for the future, don’t we need to be perceived as a more palatable group of companies? And the lingo that was being used was “digital financial services”. The regulators were lumping us in that way. We said to ourselves, let us use the same language. In a sense, we sort of mirrored what the regulator has, and what the World Bank and all these other Development Financial Institutions (DFIs) were using.
That is how we came to call ourselves digital financial services.
Secondly, the rebrand was timely because even though we started as purely lending services, we are now starting to see how we can expand our services across our customer base. Can we offer savings products? Can we offer insurance products? Can we embed insurance in our own product offerings? That bouquet of products now also means that we are not purely digital lenders. We are, for all intents and purposes, digital financial service providers.
Joseph: How is the membership of the DFSAK looking?
Kevin: We are 31 members out of 400 providers. But these 31 are the top lenders representing about 90% of the market share. The reality is that even if there are many lenders, the majority are minor players. Our membership represents 90% of the “unregulated” lending space. Regulated here refers to banks and we do have banks that are also in digital lending.
Joseph: How is the trend of the membership over time?
Kevin: We are growing and we see more members or players that want to start to raise funds, increase their book sales, now understand the work that has been done to get us to where we are. We, as an association, have been part of some critical milestones. The Digital Credit Providers (DCPs) had a big stake in innovation. We were part of the team that has been pushing for data privacy and the enforcement of data privacy laws. We have supported several initiatives by DFIs to gather information on our borrowers so that we can start identifying problems such as over-indebtedness and others. Then we can start solving them as an industry rather than case by case. As our name grows and the work we are doing gets publicised, the membership is growing.
Joseph: What would you say are the benefits for a Digital Financial Service (DFS) provider in joining DFSAK?
Kevin: The major thing is that we speak as a collective voice. Through that, we have been able to articulate our problems to the stakeholders, in particular government, with one voice. We have been able to push through some of our ideas that have been fundamentally important to the success of our industry today. I am talking about digital credit provider licensing, tax predictability, consumer protection, and data privacy. Those are the things we are talking about with the regulators.
Joseph: What do you see right now as the key risks in digital financial services, especially for consumer lending? What are the risks for you as the firms, as members of DFS, and the risks that are there for the borrowers?
Kevin: The risk that I will start with is affecting businesses and the borrowers. In 2020 the central bank made a grave mistake by instructing unregulated lenders to stop submitting data to the credit bureau. Remember the credit reference bureau is not a mere blacklist. It is basically a report of your credit behaviour. You pay your loans on time, it is recorded. If you pay your loans late, it is likewise recorded. That loss of reference data created a situation where a borrower could go to several loan apps and because we could not access the bureau, and we could not submit data to the bureau, we could not see that the borrower had taken loans from another lender.
We now have Kenyans who are in significant and serious debt distress. They have loans of up to a KSH1mn (USD6,500) from 30 loan apps. Such a person may only be earning a salary of KSH50,000 (USD325) a month. But they have to pay all that loan within 30 days. Where will they get that money? As a result, they get these late fees penalties. The late fees make the loans even more expensive. The borrowers end up with more debt and get deeper into the distress. This problem is like a cancer, and it proliferates throughout the community.
We are battling this contagion, and this energy of risk now in the whole industry.
Joseph: I supposed one could also argue that by not having access to credit reference information, it means in the case of somebody who is a conscientious borrower and pays their loans on time, then you are not able to see that as well and improve their credit score?
Kevin: Yes, we are also punishing the people that are good borrowers by not having that information. The last governor of the CBK [Central Bank of Kenya] simply demonstrated poor engagement with the industry. You can see it already from the time he let some banks collapse, up to the end of his term. The ripple effect is now here.
Joseph: So, poor decision, poor engagement. The intentions could have been fine-tuned, for example by talking to people who are in the industry and facing these things every day.
Kevin: To say the least, I was very disappointed.
Joseph: The Digital Credit Providers (DCP) regulations of 2022 bar digital lenders from using threats, violence, obscene language, profane language against customers or their references or contacts, shaming, and such unethical behaviour. Are you seeing effective application of those regulations? Are things getting better from where you see?
Kevin: They are. A lot of the licensed entities, once they got their licenses, have improved performance. They have been let back into the bureau. The tax regime is predictable. Now, the challenge we have is the number of licenses being issued. We have massive delays in approval of licenses.
Joseph: What is the cause of the delay in issuance of licenses? Is there any reason given?
Kevin: There is simply mediocrity in how we perceive our different roles in life. On the one hand you will hear there is a need for dollars coming in the form of FDI [Foreign Direct Investment], but on the other hand, the people who are bringing in hundreds of millions of dollars are being delayed. This gatekeeping makes one wonder.
Joseph: Essentially you find yourself asking “What are we doing?”
Kevin: That is the basic question. The second question is: what is the plan? So, to answer your question, I don’t know. We have written to CBK. We have been insulted in the responses. We have asked for meetings — those requests have been declined. Yet we are citizens of the nation. We are perceived as threats. I have always wondered why are we seen as a threat? Is it that we are a threat to banks? Those are the banks that have balance sheets in the trillions of shillings. Why are you worried about that?
Joseph: There is always comfort in the way we have been doing things. Is it perhaps the case that innovation is not always comfortable for everyone?
Kevin: We have not gotten that sense of resistance to innovation specifically because of the history we have with M-Pesa during its early approval stage. By the way, the CS [Cabinet Secretary/Minister] of Finance today was the governor of the central bank that approved M-Pesa [in 2006]. We were very hopeful that we were going to see major change of approach, especially after the last regime’s painful period. I would imagine as a central bank that the objective is to ensure that there is a certain level of innovation happening in the sector, and that the jobs and value created are domiciled in Kenya. Personally, I don’t know if that perspective is even considered at some of these institutions.
The lack of stakeholder engagement, the perception that we are a threat, that we want things to go our way — that is completely wrong. I am 36 years old and I am finding myself dealing with a generation of Kenyans, in leadership, that are just stuck in their own bubble. They do not seem to realize that we entered the 21st century. There is a modern way of doing things.
Joseph: In a way, there are opportunities and we are denying ourselves the chance to make real difference?
Kevin: I think we have led this very mediocre existence and gotten away with it. It has become a way of life. We should never give up though. The good thing is there is always somebody inside there that understands. Unfortunately, they may not in the power position yet and thus may not change things. Maybe one day they will, and we hope they will. We will see.
Joseph: Coming to DFSAK code of conduct, you have already published a code of conduct. You receive complaints via the DFSK website if your members do not live up to this code. Can you give us a feel of the numbers?
Kevin: Incidentally, our code of conduct has just been updated and we are actually relaunching it in a few days. It is an important piece of work because it sets a minimum standard for consumer protection. That is already set in the regulations, but we just wanted to be a little bit stricter with ourselves.
The complaints have lessened. There used to be quite many complaints. At times we were getting hundreds of complaints a week. Now we are getting a few per week. However, there are surges every now and then. We help the complainants write emails to the relevant authorities now that there is a consumer redress mechanism embedded in the law for both data privacy and harassment by service providers. We make sure that the complaints reach the right offices. You may have seen lot of fines coming out of the Office of the Data Protection Commissioner (ODPC) arising from these follow ups.
Joseph: If you then find that one of your signed up members is involved, what happens to such a member?
Kevin: We have a complaints board that reviews the complaints. Then there is a process in which the offenders are either sanctioned or ejected. The most we have done is eject a provider. It is easier to disassociate. Notably though, a lot of complaints have been coming with regard to service providers who are non-members of DFSAK.
Joseph: To what extent does your association work with other bodies such as Consumer Federation of Kenya (COFEK) and Office of the Data Protection Commissioner (ODPC) in driving down these cases?
Kevin: The ODPC is a critical office and is based on the 2010 constitution. It is based on a very modern law, right from the start. We are setting standards. There are certain sectors in Kenya where we do not even play on the African level, we are global. China is looking to see what we are doing. The US is looking, and they are using us for benchmarks. The ODPC and the leadership there are definitely going to set a standard globally at some point. We are an example in regulatory body. We do work with the Country Association of Microfinance, the Kenya Marketers Association, the Credit Information Sharing Association of Kenya, and the Communication Authority. Those are the main stakeholders that we engage and interface with.
Joseph: Within East Africa, obviously Kenya has made great strides in digital financial services. Do you see opportunities for regional collaboration with like-minded organizations?
Kevin: The Bank of Uganda and the Bank of Tanzania already consume some of our reports. I think a lot of the work we do, not just as an association but as a country, transcends our boundaries.
Joseph: Finally, what is in the immediate future for digital financial services association of Kenya in the near term?
Kevin: We have a big project in the works. We want to take a proactive approach in solvency. We are coming up with a concept known as the debt counselling mechanism. Counselling, just like marriage counselling. We have our pilot running. We want to see if this pilot will show signs of success. We want to see if we can succeed in helping Kenyans get out of their distress, if we can rebuild their credit histories and improve their credit health, but most importantly, demonstrate, hopefully to the regulators again, that there are good ideas that they need to support. Potentially even have the regulators take ownership, because this should be in their sights.
Joseph: One would imagine the regulator should be very interested and in this.
Kevin: Correct, this should be driven from there. It is a huge problem. The political class is getting complaints all the time. However, the solutions are not coming. There seems to be a mentality of ‘let us blame the lending firms’.
Joseph: I suppose, it is easier to blame the digital financial service providers and say: why are they not doing all they can?
Kevin: That is what I am seeing as well. It is that mediocrity that I mentioned. That lack of critical thinking and it is holding us all back. If we were thinking critically and saying: in fact, yes, this is a problem, then we can begin to do something about it. This problem stems from a bad decision we made in 2020 that had good intentions. The mistake we made in that bad decision is affecting all stakeholders. Now the stakeholders are saying this problem is bigger than ever. We need to solve it. What do we do now?
Joseph: Specifically, what is in that pilot project?
Kevin: We did an article in the media, and we got a lot a lot of people emailing us about debt distress. We then emailed those people; we chose a group, and we asked them to consider joining the pilot project. They sent us a list of all the loans they have and now we are talking to our members in DFSAK to see the best possible outcome. We simply figure out how to consolidate the debt so that the borrower pays one payment per month for a period of time and gets out of their debt situation. We monitor that and see: is this guy a serial defaulter, or was he just in a situation that forced him to take all these loans? Was it just financial illiteracy? It is about identifying what the core problem is and then also solve for that.
Joseph: That works well works for the consumer and it works also for the digital financial service providers. Hopefully you get the support you need from the regulatory bodies in the pilot and beyond.
KevinL: Yes, the initiative definitely needs to be supported. It is a no-brainer.
