More digital lending regulation is needed to protect borrowers’ rights
Originally published on Global Voices
Man happy to receive a loan from loan apps. Image by Ali Mkumbwa, from Unsplash (Free to use).
Kenya has emerged as a leader in digital innovation across Africa, with mobile money services like M-Pesa revolutionizing how people access financial services. Building on this trend, digital lending apps have rapidly gained popularity, offering instant loans with minimal requirements. Unlike traditional banks that require collateral or a formal credit history, these apps rely on data from borrowers’ smartphones to assess their creditworthiness. This innovation has enabled millions of Kenyans to access emergency funds and grow their businesses, particularly those excluded from formal banking systems.
Despite these benefits, the growth of digital lending has come with significant challenges. Privacy breaches and unethical lending practices have raised concerns among borrowers and regulators. Reports of harassment, public shaming, and invasive data practices have tarnished the reputation of these platforms. While these apps address financial inclusion gaps, their operations often exist in a murky legal environment, leaving borrowers vulnerable to exploitation.
A viral thread posted by a Kenyan online influencer, “Cyprian, Is Nyakundi,” vividly showcases these practices. The thread included screenshots of humiliating messages borrowers received. In one example, a borrower received a text stating:
Another ones. I thought there was a crackdown on these guys pic.twitter.com/plwVX8QgQl
— Cyprian, Is Nyakundi (@C_NyaKundiH) November 25, 2024
In the first message above, a borrower was labeled as “BINGWA WA MADENI” (Champion of Debts). This message mocks the borrower’s inability to repay and threatens to block them from accessing future loans. The language is both insulting and demeaning, reflecting the aggressive tone that many digital lenders adopt.
The second quote, on the other hand, aggressively accused the borrower of owing debts everywhere — from groceries to shoes to rent — and demanded immediate repayment. Shockingly, the amount owed was only KSH 432 (approximately USD 3.35). Despite the small amount, the lender resorted to demeaning language, shaming the borrower, and providing payment details as if the situation was a dire financial crisis.
The above examples demonstrate the extent to which borrowers are humiliated by lending apps. The messages, shared publicly on social media, have ignited a broader conversation about privacy violations and the unethical practices of digital lenders in Kenya. For borrowers, these tactics often result in emotional distress, damaged reputations and relationships, and an erosion of trust in digital financial systems.
When borrowers download these apps, they are often required to grant extensive permissions, including access to contacts, call logs, and SMS messages. This data is used to build credit profiles and, more controversially, to exert pressure during debt collection. A report by the Centre for Intellectual Property and Information Technology Law (CIPIT) at Strathmore University revealed that most lending apps collect far more data than necessary, with little transparency about how this data is used or stored.
These apps often exploit loopholes in Kenya’s data protection laws. For instance, borrowers are rarely informed about how their data will be shared with third parties. A borrower’s contacts may receive messages shaming the borrower without the contacts’ consent. This practice not only breaches the borrower’s privacy but also involves the unauthorized use of others’ personal information.
Debt recovery practices employed by some digital lenders have been described as cruel. Borrowers who default, even by one day, have reported receiving threatening messages. In more extreme cases, lenders send bulk SMS messages to the borrower’s contacts, accusing them of being scammers or warning them against associating with the borrower.
These tactics have led to public outcry, with many calling for stricter regulations. For instance, a borrower in Nairobi shared how a lender texted her family member, saying, “Hello, kindly inform XX to pay the Okash loan of Sh2560 TODAY before we proceed and take legal action to retrieve the debt.” Such harassment often causes borrowers to prioritize repayment over essential needs, compounding financial distress.
Kenya’s Data Protection Act, passed in 2019, outlines clear guidelines on data collection, consent, and usage. It prohibits organizations from sharing personal data without the explicit consent of the individual. However, the enforcement of these laws has been inconsistent, allowing some digital lenders to operate unchecked. The Office of the Data Protection Commissioner (ODPC) has received numerous complaints about privacy violations by lending apps, but resource constraints and legal loopholes have slowed action.
However, progress has been made in regulating digital lending, with the Central Bank of Kenya (CBK) implementing stricter licensing requirements. The 2021 regulations empower CBK to revoke licenses of lenders who resort to intrusive debt recovery tactics, such as making harassing phone calls to defaulters’ friends, business associates, and family members. In line with these measures, Google has updated its Personal Loans policy to prohibit apps that primarily provide or facilitate personal loans from accessing users’ contacts or photos.
However, many unregulated apps continue to operate, often changing names or rebranding to avoid detection. This regulatory gap leaves borrowers vulnerable and undermines trust in the digital lending ecosystem.
Under Kenyan law, borrowers have several rights, including the right to access their personal data, demand its deletion, and object to its misuse. However, many borrowers remain unaware of these rights, leaving them at the mercy of predatory lenders. Education campaigns by consumer rights organizations have been instrumental in raising awareness, but more needs to be done to ensure borrowers can exercise their rights effectively.
One potential solution lies in empowering borrowers through technology. Platforms like the ODPC website now allow individuals to report privacy violations and lodge complaints against non-compliant lenders. However, the process is often lengthy and bureaucratic, discouraging many borrowers from seeking redress.
While Kenya’s digital lending challenges are significant, they are not unique. In Nigeria, similar apps have faced backlash for their invasive practices, with some borrowers reporting harassment and public shaming. In India, digital lenders have come under scrutiny for their high interest rates and unethical debt recovery methods. These global parallels highlight the need for a coordinated approach to regulating digital lending and protecting borrowers’ rights.
In contrast, countries like the Philippines have made strides in curbing such practices by imposing hefty fines on lenders who violate privacy laws. Kenya could learn from these examples by strengthening its regulatory framework and ensuring that non-compliant apps face severe consequences.
To address these issues, Kenya needs a multi-pronged approach. Regulators must close legal loopholes and ensure stricter enforcement of existing laws. At the same time, public awareness campaigns can educate borrowers about their rights and the risks of using unregulated apps. Advocacy groups, tech experts, and financial institutions must collaborate to create ethical lending standards that prioritize transparency and fairness.
Additionally, the role of technology cannot be overlooked. Developing centralized platforms where borrowers can check the compliance status of lending apps before downloading them could help mitigate risks. Regulators could also explore integrating artificial intelligence to monitor and flag non-compliant apps automatically.
While digital lending has the potential to transform lives by providing access to credit for underserved populations, without proper safeguards, it can also lead to exploitation and abuse. For Kenya, the challenge lies in balancing the benefits of financial inclusion with the need to protect individual privacy and dignity.
