Fintechs offer a value trap, an opportunity for borrowers

Experts are urging virtual borrowers to tread carefully as the skyrocketing cost of living pushes many into the arms of lenders.

The convenience and presence of virtual spaces on the internet has seen a number of unsuspecting virtual borrowers fall prey to predatory lenders in the recent past.

The modus operandi of a number of ‘mobile lending apps’ has raised a number of questions, with many of their customers at risk of being scammed.

Anecdotal evidence has shown that by the time a transaction is wired to the customer’s mobile phone, nearly half of the requested amount has been deducted for various unreliable reasons.

For example, each “subsidized loan” that one applies for is charged fees such as service fees, risk management fees and even organization fees before it is deposited. All this before interest on the cash loan is deducted.

The Uganda Communications Commission (UCC) has described the mobile lending apps that predatory lenders use as nimble.

UCC Executive Director, Ms. Irene Kaggwa-Sewankambo, likens the situation to when “the loan sharks or money lenders first exploded onto the financial scene” in the country.

Ms Kaggwa says that even after doing their homework, people targeted by the apps should “always be careful”.

The UCC regulates telecommunications services and infrastructure where predators literally hide in plain sight. The regulator works in tandem with the central bank which provides technical advice and intervenes if necessary to ensure the safety of the digital or fintech financial industry.

“There has been a debate about what kind of regulatory oversight is needed over fintech and digital financial services to protect consumers and in keeping with fair competition versus the requirements placed on traditional financial institutions,” Ms. Kaggwa.

“While some of the requirements placed on traditional financial institutions may be onerous for fintech or digital financial services, there is still a need to protect consumers from exploitation,” she added.

Ms Kaggwa says the ubiquity of the internet “adds another twist to this puzzle” in that there are a lot of uncertainties about how actors operate in different jurisdictions.

“For example, how sure are you of who they claim to be, where they are, where would you find them if they suddenly disappeared?” she said, adding, “So Ugandans have to be very careful and do their due diligence. Assess the risks before transaction. What is easy may turn out to be more expensive in the long run.

When contacted, the Director of Research at the Bank of Uganda (BoU), Mr. Adam Mugume, said, “Mobile lending apps do not fall under the category of financial institutions supervised by the BoU.”

This effectively means that the central bank cannot sanction predatory lenders. The National Payments Systems Act 2022 formalized the BoU’s regulatory oversight of digital financial services such as mobile money operating in the country. The central bank admits its powerlessness against predatory lenders whose network of deception could be transnational.

“Consumers should be asked to disassociate themselves from unregulated financial service providers. Otherwise, when they face challenges, no regulatory institution would have the mandate to intervene on their behalf,” Mugume warned, adding, “If the consumer of financial services feels cheated by a financial services supervised by the BoU, we have a customer complaints office which handles these complaints.

Fintech startups in Uganda on the other hand called for a broad brush not to be used when sentencing.

Mr. Innocent Kawooya, whose HiPipo Foundation was awarded Best Financial Inclusion Organization in East Africa at the 2022 Fintech Awards, says bad apples should be put aside. He advises against throwing the baby out with the bathwater.

He said, “For many years, banks and other players in Uganda’s formal financial system failed to meet the target of more than a few million people borrowing money in a single way.

He attributes the woes of traditional banks to “unattainable…know-your-customer requirements” which, among other things, require borrowers to have collateral, a solid employment record and proof of earning a regular salary.

“We are now seeing a seismic shift in the way lending is done,” he says, adding, “It was mobile network operators first partnering with banks, as we see with NCBA and MTN Uganda, and Jumo’s partnership with Airtel, for example, have introduced micro-loans as low as $2, which you get on your phone in real time, and can be repaid at just 9% interest after a period of one month.

Mr. Kawooya further reveals that other players like Card Pesa and Numida that can allow “a borrower…to repay within a week at the same fixed interest rate” have joined the space.

“Attitudes that governed lending for a long time are being erased,” Mr. Kawooya notes, adding, “Players in the micro-lending space are not shy about offering credit below $300. easily target long-underserved people – like farmers – as long as, say, the village president knows about them.

Mr. Kawooya admits that “the costs are still so high for most low-income users,” but is quick to add that “a concerted effort must be made to build meaningful collaborations, especially on rails. of buildings and the rules of new age digital lending platforms to ensure that they are made more affordable for the end user.

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