GACHAGA: Kenya's predatory lending boom: When banks said No

Once upon a time— before Adam Smith’s invisible hand and Joe Donde’s very visible attempts at regulation— being considered “too risky” for a bank loan meant the end of the road. You simply had to find another way to survive, maybe turn to chama savings or a willing relative.

Enter mobile lending: Quick, convenient and—oh, so expensive. M-Shwari, Tala, Branch and a whole army of digital lenders arrived, ready to serve the “unbankable” at the tap of a button.

It seemed like a financial Cinderella story—except, instead of a glass slipper, borrowers got slapped with sky-high interest rates and impossible repayment terms.

Meanwhile, the Central Bank of Kenya watched from the sidelines— perhaps amused, perhaps horrified. Eventually, they stepped in—not to curb exploitation, but to demand licensing.

DIGITAL LENDING: A LIFELINE OR TRAP?

Meanwhile, lenders, always a few steps ahead, found ingenious ways to bypass regulations, proving once again that in finance, necessity truly is the mother of invention. Mobile lending apps promised financial inclusion, and to be fair, they delivered—sort of.

They provided quick loans to millions of Kenyans, many who had no formal banking history. Entrepreneurs could get capital, medical emergencies covered; mama mboga (and God forbid mama pima) could be paid in time.

However, this financial lifeline came with fine print that would make even the most seasoned lawyer wince. What started as microloans soon turned into micro-nightmares.

The advertised interest rates seemed manageable—until borrowers realised that repayment cycles were absurdly short (30 days) coupled with impossible interest rates and fees.

Banks were not going sit back, remember the annual bonuses? But how could they compete when interest rate caps tied them down?

Simple: rename the interest. Instead of charging higher rates, they started adding “access fees,” payable every month until the loan was cleared.

These fees, when calculated over time, often exceeded the legally capped interest rates—proof that where there’s a will (and a profit incentive), there’s a loophole. Defaulting on a loan in the digital lending world isn’t just financially painful—it’s socially embarrassing.

Borrowers reported aggressive debt collection tactics, from lenders calling their relatives to public shaming via SMS. Some lenders even resorted to tactics that would be more appropriate for mafia movies than financial services.

REGULATOR’S REACTION: A CASE OF TOO LITTLE, TOO LATE?

Seeing the chaos unfold, CBK finally intervened—but in the classic government style of addressing symptoms rather than causes. Instead of focusing on controlling runaway interest rates, unethical collection practices, or unfair credit blacklisting, they simply required all digital lenders to be licensed.

This move gave the illusion of oversight while doing little to curb the fundamental problem: exploitative lending. At best, licensing requirements filtered out some of the most reckless lenders. At worst, it created a regulatory bottleneck that legitimate businesses had to navigate, while more cunning operators found new ways to stay ahead of the game.

THE FUTURE: CAN BORROWERS CATCH A BREAK?

So, what’s the way forward? If banks have proven unreliable, and the regulator has shown hesitance in reining in exploitation, what’s left? The idea of an interest rate cap isn’t bad (as my 20-year-old junior would have you believe).

Let's remember, the CBK is focused on monetary policy; expecting them to also protect consumers is like asking a referee to coach a football team. A separate, independent watchdog should be given the power to investigate and penalize predatory lenders.

CONCLUSION

The mobile lending industry in Kenya has become a massive cash cow (mental note to buy more Safaricom shares) and banks have eagerly joined the feeding frenzy. Borrowers, caught between desperation and limited choices, continue to take out loans under predatory terms. For now, the lending industry remains one step ahead of the regulators.

But history tells us that when financial bubbles grow unchecked, they eventually burst. The question isn’t if the predatory lending model will collapse, but when—and whether Kenyan consumers will be the ones left taking a bath in the aftermath of the burst.

Alfred Gachaga is a compliance, risk and fintech executive