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In January 2024, the Minister of State for Microfinance reportedly suspended the licensing of online money lenders on account of opaque operational procedures, exorbitant interest rates, and privacy concerns. The Minister also noted that a number of these online lenders were unregulated, which created oversight and regulatory concerns.
In a previous article, we noted a proliferation of digital lenders who were seemingly operating outside of the existing financial services regulatory framework and yet posed several challenges to consumers including privacy breaches, predatory lending practices, debt shaming, and a series of other unethical practices. Ultimately, the article made the case for regulation of digital lending, as has been done in Kenya and India, to ensure an orderly sector and one that protects consumers. (Previous article can be accessed here)
In response to the calls for a need to regulate digital lending, the Uganda Microfinance Regulatory Authority (UMRA) published the Digital Lending Guidelines 2024 (the “Guidelines”), applicable to institutions or money lenders providing credit digital credit and are licensed under Tier 4 Microfinance Institutions and Money Lenders Act, 2016. This article provides an overview of these Guidelines.
An Overview of the Guidelines
The Guidelines provide for the following critical aspects:
- Authorized Activities
The Guidelines designate providing credit as the only authorized activity a digital credit provider shall be licensed to undertake. The Guidelines prohibit digital lenders from deposit-taking or an invitation to customers to do the same.
- Licensing
The Guidelines establish licensing criteria for persons desirous of conducting digital credit business. It is notable that the Guidelines prescribe a requirement for significant shareholders, directors, and chief executive officers of a digital provider to satisfy the fit & proper criteria set out by the Authority as part of the licensing requirements.
Additionally, it is also notable that the Guidelines require a provider to satisfy the Authority that it has in place policies and procedures on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) and data protection & privacy. It may indeed be argued that a key focus of the Authority is to ensure providers have sufficient controls against financial crime and are prioritizing the privacy of consumers and on this basis, they must provide evidence of source of funds as well as evidence of registration with the Personal Data Protection Office.
- Corporate Governance
Digital credit providers are required to implement sound corporate governance practices based on ethics & integrity, sound risk management, compliance with the law, and legitimacy. While the Guidelines do not expound further on the corporate governance standards licensees are expected to implement, they are required to submit a corporate governance policy as part of the licensing requirements.
- Data Privacy
As highlighted above, the Guidelines put an emphasis on the privacy and confidentiality of customers’ personal data and transactions. The Guidelines prohibit licensees from sharing a customer’s information without consent from the customer, and this extends to sharing credit information with credit reference mechanisms.
Additionally, licensees are prohibited from deploying software that accesses a customer’s private information including contact lists, and phone messages as a means of delinquency management and for KYC purposes. This particular prohibition is especially critical because digital lenders have been using this access to consumers’ information as a means of debt collection – through contacting contacts of borrowers as a collection strategy. Numerous complaints of harassment and debt shaming have consequently ensued. The Guidelines therefore address this great concern.
- Debt Recovery
The Guidelines also solve challenges in the debt recovery methods deployed by the digital lenders and their agents – which have been noted to include harassment, threats of violence, debt shaming, and other unconscionable means by strictly prohibiting them. The Guidelines go as far as requiring a licensee to provide customers with a list of the empanelled collection agents authorized to contact a borrower in the event of default.
The Guidelines also limit the interest recoverable from non-performing loans and prohibit providers from levying penalty interest on default that exceeds the initial interest at the time of offering the loan.
- Consumer Protection
The Guidelines require licensees to put in place consumer protection mechanisms including complaint resolution mechanisms, and disclosures on the products and pricing of the loans extended by a licensee. Additionally, the Guidelines require that a licensee maintains at least one physical office. The presence of a physical office goes a long way in building trust in the public and may be an additional vehicle for handling consumer concerns and disputes.
Conclusion
The publication of the Guidelines is a critical step towards regulating this fast-growing segment of the financial services sector. It must be noted, however, that the jurisprudence from the courts indicates that Guidelines are interpreted as being directory and generally not binding. To this extent, in order to further cement regulation in this space, concrete and enforceable legislative interventions will be required in the near future.
Disclaimer: “The views and opinions expressed on the site are personal and do not represent the official position of Stanbic Uganda.