New Collections Rules Are Forcing Digital Lenders to Rebuild Their Whole Model

For years the business model of app-based lending in East Africa rested on a quiet lever: at signup, the app read the borrower's contact list, and on default, it called them. Shame worked where collections agents could not reach. As of last month, in two markets, it is illegal.

The new rules prohibit contacting anyone other than the borrower and any guarantor explicitly named at origination, bar the use of contact-list data for any purpose, and require lenders to delete contact data already held. Penalties run to 4% of annual turnover.

"Every model we have was calibrated on a collections process we are no longer permitted to run," said the chief risk officer of a Nairobi lender with about 900,000 active borrowers, who asked not to be identified because the company is in discussions with the regulator. "Our thirty-day default rate has gone from 6.1% to 9.4% in seven weeks. Nothing about our borrowers changed. Our leverage changed."

Lenders are responding by tightening approval, shortening tenors, and — in at least three cases — raising prices to the regulatory ceiling. Consumer advocates argue that is the point: credit priced on the assumption that a borrower can be publicly humiliated was never priced honestly. The next two quarters will show whether a market that has to underwrite properly is still a market at all.