Regulate? Mobile-based online lending firms may be money laundering channels says Central Bank of Kenya governor

Mobile-based lenders pose money laundering risk, says CBK

Mobile-based online lending firms should be regulated to avoid their usage as channels for introducing illegally-obtained cash into the financial system, Central Bank of Kenya governor Patrick Njoroge has said.

In a presentation to parliamentarians Wednesday, Dr Njoroge singled out Tala, Branch and Okash — three highly-popular digital money lenders — as credit-only mobile lending institutions that could be easily used to launder illicit cash.

Money laundering, which involves transferring and disguising illegally obtained cash to make it look legitimate, is mostly used by criminals and the corrupt to clean their wealth.

The CBK boss Wednesday said the key concern for regulators was the source of funds that the institutions are lending to the public.

“Tala, Okash and Branch… these are the institutions I’m talking about.
There is a huge lacuna because there is no specific law that is targeted at them,” Dr Njoroge told the Senate Committee on ICT at a hearing Wednesday.


“There are gaps because we have laws for commercial banks and not credit-only institutions that use individual resources for lending. In fact, these institutions are nothing but shylocks.”

The three digital lenders have in recent years raised billions of shillings for onward lending to cash-hungry Kenyans.

The San Francisco-based mobile loans lender, Branch International, in April inked a $170 million (about Sh17.1 billion) loan and equity deal with Visa, te American digital payments giant, and other investors for onward-lending in Kenya and other markets that it operates in.

Branch said the fresh capital and new partnership with Visa would expand its loan book and spread its services. Under the deal, Branch and Visa were to team up to offer virtual prepaid debit card numbers to customers around the world.

The Nairobi Securities Exchange-listed Centum Investments in January announced that its capital-raising advisory firm, Barium Capital, had helped Branch International to raise Sh500 million for local on-lending.

On Wednesday, Dr Njoroge said online lenders pose a serious problem for the regulator.

“It is problematic to CBK when you think of money laundering. We see a major weakness because they can upscale very quickly and we need to regulate them because they have to be right-sized since they are not using depositors’ money and they are not under prudential guidelines,” he said.

Criminal activities

The digital lenders are currently estimated to constitute less than one percent of the total financial services industry.

Money laundering is heavily linked to criminal activities such as terrorism and drug dealing.

“We are playing with matches and we are in petrol stations where the danger is significant. A match is not that large but it can light up a petrol station.

“We are aware of the dangers unregulated, credit-only organisations can pose to the entire financial sector,” Dr Njoroge told the Senators.

Banks, microfinanciers and saccos are regulated under the CBK Act and the National Payment System Act while chamas are regulated under the Societies Act.

CBK licenses and regulates electronic retail payment services providers in addition to all deposit-taking financial institutions.

The regulator is also concerned with customer data protection by credit-only lenders, the high interest rates or transaction fees that they charge on borrowers, multiple borrowing from different lenders, non-disclosure of pricing terms and their lack of dispute resolution mechanisms.

The unregulated credit-only institutions are fast growing partly due to people’s desperation for cash, healthcare or school fees. Borrowers in most cases enter into the arrangements under duress.

“I think we need to provide more channels for lending to consumers and some banks have gone this way,” Dr Njoroge told the committee chaired by Halake Abshiro.

The governor appeared before Senators alongside the ICT principal secretary Jerome Ochieng and Communications Authority (CA) director-general Francis Wangusi.

More information

The CA said advertisements by credit-only service providers are common and there is need for a requirement that they provide more information.

“We are concerned of products coming outside of this country,” Mr Wangusi said. “We are consulting the Treasury, the ICT ministry and CBK to block those products because they could be more dangerous than credit-only products”.

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