Fintech is widely perceived as a game-changer in Sub-Saharan Africa (SSA), transforming the financial sector and bringing about unprecedented accessibility to financial services. With the region being home to more than half of the world’s mobile-money users, the industry is thriving and poised for long-term growth. However, as with any new technology, it also brings with it challenges that need to be addressed. Fintech adoption in SSA is in a state of imbalance, heavily skewed toward negative outcomes. While it has the potential to increase financial inclusion, the risks of compromised privacy and data protection, increased consumer vulnerability, and inadequate regulation outweigh the benefits significantly. This poses a serious threat to individuals and communities, while simultaneously eroding trust in the financial system.

This is the first of a two-part series on the impact of fintech on Africa’s financial landscape. Part 1 looks at the challenges and complexities surrounding digital lending. This essay specifically looks at how predatory digital lending affects consumers and explores potential regulatory measures to address this pressing issue. As we set out on this journey, we must first face the daunting question: Can we tame the beast, using fintech’s strength for the greater good, or will it always haunt the dreams of progress?

The Growth of Fintech in SSA

With the increased use of mobile technology, fintech companies have developed mobile-based financial services and products that are accessible and convenient for everyone, whether banked or unbanked. Statista’s most recent report provides compelling insights into the fintech market. It predicts that the digital investment sector will dominate in Africa, with a significant transaction value of USD 994.40 million by the end of 2023. Furthermore, the report states that the digital assets segment is expected to grow at a rate of 36.1% by 2024. In terms of digital payments, the report predicts a user base of 610.90 million by 2027. But that’s not all – as more young people enter the labor force, the demand for financial services and products tailored to their lifestyle, such as digital payments and online lending, has never been higher. Governments and regulators are also encouraging fintech growth by fostering a favorable operating environment for fintech firms and encouraging financial sector innovation. The Central Bank of Kenya, for instance, has helped to put African fintech firms on the map by hosting tech festivals to identify and support promising fintech companies. With so much momentum behind fintech, Africa’s financial future is limitless, or so it seems.

Fintech is the continent’s fastest-growing start-up industry, accounting for 54% of all known start-up investments from 2021. This growth is being driven by the rise of e-commerce in Africa, with SSA fintech start-ups leading the way. In Nigeria, for instance, Fintech has emerged as the most active and well-funded sub-sector within the start-up ecosystem. According to the Nigerian Start-up Ecosystem Report, 2022, published by Disrupt Africa, 36% of 481 tech start-ups are fintech ventures, nearly three times more than the e-commerce and retail-tech category, which comes a distant second. South Africa dominates the fintech market in Africa, holding 40% of the sector’s market value.

As mobile money enables financial inclusion and transformative changes in the lives of the marginalized, youth, and women, predatory forces lurk in the digital realm, casting a shadow over these advancements.

Furthermore, with the widespread adoption of mobile money technology and the internet, it is now possible to avoid traditional banking infrastructure and provide more efficient and convenient e-commerce solutions. This link is critical for increasing e-commerce efficiency and security, thereby boosting the growth and prosperity of SSA fintech firms. But it’s not just about business, fintech is changing people’s lives as well. A significant portion of the population in many African countries remains unbanked or underbanked, representing a huge untapped market for fintech companies. In SSA, mobile money accounts already outnumber bank accounts, demonstrating that fintech is an effective tool for increasing financial inclusion. As mobile money enables financial inclusion and transformative changes in the lives of the marginalized, youth, and women, predatory forces lurk in the digital realm, casting a shadow over these advancements.

The Sharks in the Water: Predatory Lending Practices

According to Crunchbase (as of March 2023), the fintech industry in Africa is thriving, with 529 consumer-lending companies operating on the continent, offering an alternative source of credit to those who cannot access traditional bank loans. While the rise of fintech start-ups in Africa has increased access to financial services, it has also contributed to the prevalence of predatory lending in many African countries that trap borrowers in endless debt cycles.

Fintech is the continent’s fastest-growing start-up industry, accounting for 54% of all known start-up investments from 2021. This growth is being driven by the rise of e-commerce in Africa, with SSA fintech start-ups leading the way.

In 2017, the Kenya Financial Sector Deepening reported that most Kenyans use digital credit to fund businesses, meet household needs, and pay salaries. However, the accessibility of mobile lending has been abused by both the borrowers and loan providers, encouraging predatory lending practices, not just in Kenya but throughout Africa. Through unsolicited text messages and calls, loan providers in some fintech companies entice potential borrowers with often exorbitant interest rates. Despite the relatively low loan amounts, borrowers can quickly accumulate a significant amount of debt through mobile loans. The borrowers also face late fees, lender harassment, and ever-increasing interest rates. When borrowers are hesitant or unable to make payments, creditors frequently resort to invading the borrower’s privacy by contacting the borrower’s family and friends in order to obtain repayment.

According to a recent survey, a staggering 65.9% of credit holders defaulted on their mobile loans in 2021. These figures vividly paint a picture of the country’s rampant problem with loan defaults. Predatory mobile lending practices are clearly wreaking havoc, trapping borrowers in an endless cycle of debt and plunging them into deep financial distress. Those who are most vulnerable bear the brunt of the consequences, as sky-high interest rates and ruthless debt collection tactics exacerbate their already difficult situation.

The Impact of Predatory Digital Lending Practices on the Economy

According to an economist at a top-tier Kenyan bank, “digital lending practices, though seemingly convenient, can lead to serious economic consequences”. For starters, borrowers may not be fully aware of the hidden fees and exorbitant interest rates that may sink them into financial distress. Borrowers who borrow beyond their means are more likely to default on their loans, increasing debt stress and lowering economic activity and productivity. A large number of loan defaults can result in significant losses for lenders and investors, as well as a systemic risk to the financial system. “Mobile phones are the new banks,” stated the economist, emphasizing the ease and convenience of borrowing through mobile apps. The power to secure loans rests in the palms of the borrowers, unlocking a world of financial possibilities, and difficulties, at their fingertips. This has resulted in a borrowing culture in which, despite the fact that banks or digital lending apps may impose higher fines for default, borrowers have created a borrowing chain. For example, a borrower may borrow from app X, default on that loan for a period of time, and then borrow from app Y to repay the loan obtained from app X. This leads to an endless cycle of debt. Furthermore, loan default makes it difficult for borrowers to obtain new loans, limiting their ability to invest in businesses, education, and other areas that could drive economic growth.

Additionally, predatory lending practices have the potential to exploit vulnerable populations, exacerbating existing inequalities and limiting opportunities for economic advancement. In the long term, such practices also have the potential to erode trust in financial institutions and systems, resulting in lower investment, slower economic growth, and lowered consumer spending. The economic impact of predatory digital lending is multifaceted, and it is critical to ensure that lending practices are fair, transparent, and aligned with the interests of borrowers and the economy. According to the economist quoted above, policymakers and regulators can play a critical role in identifying and addressing predatory lending practices, as well as mitigating the risks of digital lending.

Navigating an Unregulated Data Landscape

In the fast-paced world of fintech and digital lending, legitimate concerns have been raised about the complexities surrounding the use and management of personal data. Borrowers willingly disclose personal data in the pursuit of credit assessments, ranging from intricate financial details to personally identifiable social media data. They frequently do so without giving much thought to the hidden implications buried within the terms and conditions of digital lending platforms. The importance of data privacy and security grows in the context of discussions about predatory lending. To investigate these multifaceted issues, I conducted a series of one-on-one interviews with industry professionals. Their insights and experiences reveal the issues at hand and the implications that arise in the various sectors, resulting in a comprehensive understanding. These insightful interviews emphasize the critical importance of regulatory measures, consumer education, and technological advances in navigating this complex landscape and ensuring individuals’ safety in the digital age.

Through unsolicited text messages and calls, loan providers in some fintech companies entice potential borrowers with often exorbitant interest rates. Despite the relatively low loan amounts, borrowers can quickly accumulate a significant amount of debt through mobile loans.

In the first interview, I had the opportunity to speak with a fintech developer who highlighted the challenges of developing new technologies without established regulations. He emphasized the complexities of app development when there are no clear legal guidelines, stating, “When a developer sets out to develop an app, they may think, ‘What does the law say about this?’ Things become difficult when there is no law to refer to at that time.” This underscores the urgent need for regulatory frameworks to keep pace with technological advancements in the fintech sector. The developer also highlighted the consequences of hasty technology adoption without adequate oversight, leading to adverse implications that heavily weigh on the consumers.

While acknowledging the potential of fintech to enhance financial inclusion, he stressed the significance of responsible implementation with proper safeguards and oversight. The dilemma of whether to wait for established laws or navigate the regulatory landscape along the way remains a pivotal discussion within the fintech ecosystem. Additionally, to ensure the functionality of digital lending apps, developers need to gather borrower data, including phone numbers, geolocation information, and sometimes, credit scores. “In the fast-paced world of fintech, we must walk a tightrope between innovation and risk,” said the fintech developer. He explained it’s like balancing digital fireballs – they want to change lending, but there are risks to privacy, data protection, and “breaking laws that are playing catch-up with technological advancements”.

When asked if fintech developers take data protection laws and regulations into account when developing data-collecting apps, the fintech developer stated that “developers are not always aware of data protection laws and regulations, especially when it comes to predatory lending apps”. He suggested that the solutions be looked at from two perspectives: a) In the short term, there is a need to use existing and upcoming regulatory tools to reduce predatory lending practices and include a broader understanding of what it means for a digital lending app to operate safely and legally; and b) in the long-term, we need an ongoing conversation and collaboration between developers and policymakers to promote the regulation of digital lending applications in a fair and transparent manner that does not stifle innovation. By taking these proactive steps, fintech developers can help to ensure that their apps are not only effective and innovative, but also ethical and legally sound.

While regulators may work hard to draft regulations that benefit both borrowers and lenders, their efforts may be futile if consumers lack the knowledge to make use of them. They acknowledge, however, that there is a significant gap between the various parties involved. Some people, for example, distrust all banks, regardless of whether they use fintech. Further, some customers may prefer to deal in cash, which can be problematic for fintech companies. But do people in these fields understand what banking and technology, let alone fintech, entail? The question this raises is critical: How can fintech developers meet the specific requirements of these communities if they don’t know what those requirements are? While the regulator is working hard to pass laws that benefit underserved populations, they are concerned that a lack of knowledge and understanding about fintech will limit access and, if access is granted, allow consumers to be exploited by fintech firms that are unconcerned about privacy and data protection.

The Regulatory Landscape

One of the most significant challenges for policymakers is the lack of consistency in regulatory approaches across African nations. This also leads to inconsistency and confusion, making it difficult for fintech start-ups to navigate the various regulatory frameworks, especially since most fintech companies operate in jurisdictions other than the one in which they were founded. In addition to this, the rapid pace of technological change makes it difficult for regulators to keep up with new products and services, resulting in outdated regulations and a lack of innovation. Last but not the least, policymakers are at crossroads on how to address the issue of financial exclusion, which continues to be a major issue in many African countries. While fintech has the potential to increase financial inclusion, policymakers are tasked with ensuring that regulations do not unintentionally exclude certain groups of people, such as those without smartphones or internet access. But how can they achieve this, given that the system and the apps themselves are designed to encourage exclusion? To address these challenges, policymakers, regulators, and the fintech industry will need to work together, as well as commit to ongoing dialogue and engagement.

Borrowers willingly disclose personal data in the pursuit of credit assessments, ranging from intricate financial details to personally identifiable social media data.

The regulatory landscape for fintech in Africa varies across countries, with some having progressive policies while others lag behind. For instance, Ghana has implemented a regulatory sandbox that permits fintech start-ups to test innovative products and services in a controlled environment. The Central Bank of Kenya has established a regulatory framework for digital financial services. In contrast, countries like Zimbabwe and Ethiopia have been slower to enact fintech regulations, which can inhibit the growth of domestic fintech start-ups. Furthermore, many African countries face challenges such as limited access to capital and poor infrastructure, making it difficult for domestic fintech start-ups to thrive.

However, there is growing recognition of fintech’s potential, leading to improvements in the legislative landscape to support domestic fintech start-ups. Governments and regulatory bodies are increasingly attempting to create an enabling environment for fintech start-ups by enacting policies that promote innovation while protecting consumers.

To address the issue of awareness and understanding, a regulator, whom I interviewed, suggests that fintech developers should work with community leaders and organizations to gain a better understanding of their specific needs and preferences. For instance, they can run outreach programs to educate communities about the benefits of fintech and how it can assist them in overcoming financial barriers. Additionally, the regulator recommends that fintech developers create products and services that are culturally appropriate and relevant to these communities. This entails collaborating closely with community leaders and organizations to ensure that the products and services meet community needs and are simple to use. Regulators hope to create an environment that fosters fintech innovation while ensuring that underrepresented groups have access to financial services and technology by bridging the gap between stakeholders and fostering understanding.

While fintech has the potential to increase financial inclusion, policymakers are tasked with ensuring that regulations do not unintentionally exclude certain groups of people, such as those without smartphones or internet access.

Relevant stakeholders, especially economists, fintech developers, CSOs, and policymakers, can work together to address fintech regulation in African countries from various perspectives. They can work together to raise awareness among policymakers and regulators of the importance of regulations that balance innovation and consumer protection. They can also engage in policy dialogue with government officials and provide technical assistance in developing appropriate regulatory frameworks. Furthermore, they can strengthen regulators’ capacity in areas such as digital financial literacy, cybersecurity, and data protection to ensure that regulations are implemented effectively. Finally, they can monitor regulatory developments and provide feedback to ensure that regulations are flexible and responsive to consumer and fintech industry needs while minimizing risks.

Conclusion

The absence of adequate regulations in the fintech industry makes borrowers vulnerable, which is a pressing concern. Predatory lending apps flourish by exploiting oversight gaps and leaving consumers vulnerable to financial exploitation. The challenge is further exacerbated by the lack of uniform regulatory approaches among African countries, making it difficult for borrowers to navigate the ever-changing environment. As fintech innovation outpaces regulatory frameworks, outdated regulations fail to safeguard consumers against deceptive practices. The welfare of borrowers requires immediate protection. As such, a collaborative effort between policymakers, regulators, and fintech practitioners is necessary to establish robust, consumer-centric regulations and practices that ensure fair lending practices and protect vulnerable individuals from predatory lending apps. By putting borrowers first, African countries can shape a future in which financial technology promotes and protects the interests of all consumers.

This essay has been published as part of IT for Change’s Big Tech & Society Media Fellowship 2022.