Predatory lending orchestrated by the proliferation of Fintech companies in Kenya and its corollary to financial stability in the Kenyan banking sector
Abstract
This paper investigates unethical practices carried out by some fintech companies during a loan
origination process that are unfair, fraudulent and deceptive to entice borrowers to take loans that
carry high-interest rates, placing the borrowers in a lower credit rated loan to the benefit of the
lender, and the effects on financial stability of Banks in Kenya. In the recent years, Kenya has
experienced a drastic increase in mobile money lending platforms, that is, from 0% in 2016 to
79% in 2019, which has led to unbridled lending. The lending rates of the fintech companies tend
to differ from one company to the other depending with the loan repayment period which mostly
range from one week to one month. This paper examines lending rates and repayment terms of
21 fintech companies in Kenya. Some of these fintech companies include Tala and Branch
International which have a lending rate of 15% per month (180% per annum) and Mshwari which
has a lending rate of 7.5% per month (90% per annum) which when compared to the current
Kenya Bank lending rate of 12.5% gives a huge discrepancy. Predatory lending has led to petty
borrowing among Kenyans which has also led to increase in Non-Performing Loans (NPLs). As
a result many people have been listed with the Credit Reference Bureau (ORB) over small
amounts, hence cannot access loans from banks and other financial institutions. This paper looks
at the link between a credit default in one or several fintech companies and the risk that the default
may cause to banks and other financial institutions in Kenya. The findings for this paper
highlights the need for
policies that regulate operation of fintech companies and also to lessen informational asymmetry
existing between fintech companies & borrowers and between borrowers & banks in Kenya.
Collections
- SIMC 2019 [99]