Seth Onyango, bird story agency

Microcredit banks in Kenya are attracting overseas online intermediate financing firms seeking a foothold in the East African state’s vibrant fintech ecosystem.

This comes on the back of Africa’s growing shift from the traditional banking system to a digital model, due to the pandemic-induced adoption of paperless transactions.

Umba Inc, a US-based digital bank operating a non-deposit-taking credit firm in July acquired a majority share of a Kenyan microfinance bank, through its subsidiary UMBA Technology Ltd.

Umba and other digital lenders are expected to boost financial inclusion in that market and deepen access to credit for many small businesses.

Umba obtained a 66.06 per cent stake in Daraja Microfinance Bank Ltd effectively July 1, following approval by the Central Bank of Kenya (CBK) on May 23, 2022.

It is the second fintech firm to obtain a majority stake in a Kenyan microfinance outfit, after Branch International Ltd acquired Century Microfinance Bank.

Branch International Holding Ltd is owned by Branch International Inc (BI), a company incorporated in Delaware, in the USA.

By acquiring a controlling stake in the micro lenders, the digital lenders will overcome tough new regulations that seek to rein in digital lenders who are seen as pushing borrowers in into serious debt.

Many unemployed debtors and delinquent borrowers in Kenya have in recent years been forced to sell land, cars and items of sentimental value to pay off debts.

In December, President Uhuru Kenyatta was seen to nip the mounting micro debt crisis in the bud by signing into law the Central Bank Amendment Bill 2021 which brought digital lenders under CBK’s control.

The bill gives the regulator the power to license digital lenders in the country as well as ensure the existence of fair and non-discriminatory practices in the credit market.

“This is to provide the central bank with the authority to regulate the digital lenders. This is something which has been long overdue, that we’ve come all this way and we are looking forward to it becoming law and to ourselves fixing this lacuna that has been here for quite some time,” CBK Governor Patrick Njoroge to the press in November 2021.

Under the new regime, lenders will from September have to apply for approval of interest rates on their loans, disclose all terms of their credit to borrowers and have also been barred from sharing information of loan defaulters with third parties

The CBK has already gazetted the Digital Credit Providers regulations, 2022 which will require all digital lenders to apply for licences from the banking regulator before September.

CBK is expected to streamline the operation of the industry and cushion Kenyans against predatory lenders.

A statement by CBK said the investment by UMBA will strengthen Daraja MFB’s business model, adding that will particularly support the digitisation of Daraja MFB as it moves to provide ‘anytime anywhere’ services to its customers.

“This is aligned to CBK’s vision of microfinance banking sector that works for and with Kenya,” it said.

Daraja, which was licensed in 2015 and whose main customers are small and medium enterprises, has a market share of below 1 per cent of the microfinance banking sector in Kenya.

CBK data shows users of mobile-based digital lenders in Kenya, which include the Silicon Valley-backed Tala, have surged to 2 million in 2019, from 200,000 in 2016.

Kenya is a leader in both mobile money and digital lending in Africa, with more countries just beginning to adopt the tech.

A 2019 survey on digital credit found that 13.6 Per cent of Kenyans had borrowed loans from a digital lender, citing their convenience and ease of access.

For digital banking, most jurisdictions apply existing banking laws and regulations to banks within their remit, regardless of the technology they apply.

As digital lenders grow in Africa coupled with mobile banking, most of its unbanked population is expected to be roped into the mainstream financial services.

According to Global Finance, 50 per cent of the African population is unbanked, equating to 350 million people. This is already a problem that needs addressing, but with the African population rising quickly – it’s set to double over the next 30 years, adding an additional 1 billion people – it could quickly go from bad to worse.

Now, IBS Intelligence expects digital lending to redefine the dynamics of the credit market in Africa.

“With a lower cost base and improved reach, financial institutions – including banks, MFIs, neobanks and Telcos – can simply do more with less. Digital lending cuts the cost of offering services and streamlines onboarding,” it said in its analysis.

This story was republished with the permission of bird, a story agency under Africa No Filter.

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