NAIROBI, Oct. 9 (Xinhua) -- The mobile phone has become a powerful tool through which Kenyans access credit, with thousands borrowing daily from the over 20 institutions offering the service, including banks.
So popular is the digital service that banks and non-banking actors are scrambling to offer low value credit to citizens, as the industry is not bound by interest caps introduced on banking charges.
However, as thousands of citizens get hooked on mobile phone loans, Kenyan financial sector regulators are warning that digital currency poses a big threat to the east African nation's economy.
They note that increased usage of digital credit exposes the economy to challenges such as money laundering.
"Digital credit predisposes the economy to risks that include money laundering, terrorist financing and technology risks," the regulators said in the Financial Sector Stability Report released on Tuesday.
The regulators who drafted the report are the Central Bank of Kenya, the Capital Markets Authority, the Insurance Regulatory Authority, the Sacco Regulatory Authority and the Retirement Benefits Authority.
They acknowledged that digital credit channels have expanded inclusion by reducing borrowing constraints, but added that this is happening without proper supervision.
"Research has shown that financial stability risks increase when access to credit is expanded without proper supervision. It is, therefore, important that regulators are cautious to protect consumers and enhance stability of the financial sector," they noted.
The loans offered by the numerous service providers are mainly short-term and require no collateral.
The lenders, however, rely on mobile phone-based data, such as call records or social media data, to make near-immediate lending decisions via automated processes.
The loan sizes range from 10 U.S. dollars to 50 dollars for starters, but regulars access larger loans, thanks to their repeated borrowing or positive savings behavior.
Borrowers pay one-off interest rates of between 6 percent and 10 percent, which are higher than those of traditional loans offered by banks, micro-finance institutions and savings societies.
According to the report, farmers, entrepreneurs and workers top the list of those who seek digital credit.
"Entrepreneurs and farmers mainly use digital credit for business, while employees and casual workers tend to use digital loans to meet day-to-day needs," said the regulators.
But despite the risks, they noted that credit extension via digital channels holds promise for expanding financial inclusion in the east African nation.
"Digital credit creates an alternative avenue of financing for borrowers who may have previously faced constraints in accessing more traditional forms of credit," they said.
The 2017 FinAccess Digital Credit Survey showed that 35 percent of Kenyan phone owners are digital borrowers, therefore offering an estimated market of 6.1 million people in the east African nation.
Bernard Mwaso, a consultant with Edell IT Solution in Nairobi, noted that while digital credit may pose risks to the economy, it is an idea whose time has come.
"This service has not only ensured Kenyans easily access credit but it is helping move money in the economy. It is enabling people who could not access loans from banks readily get them and use the money to improve their business or settle an emergency," he said.
He observed that the regulators need to tighten supervision by ensuring all lenders play by the rules and are not also exposed to risks by rogue borrowers who take money and do not pay back.