Why digital money lenders are demanding loan you never took

Before being issued a loan, most digital lenders demand that the borrower gives a list of guarantors.

But the listed guarantors are not notified that they have agreed to pay up in the event that the borrower defaults on repayment.

Mr Victor Olao, an advocate with experience in the financial sector, argues that this alone is enough to expose mobile loans apps to losses as enforcing the contracts would be a problem before courts since many judges would deem the agreements  dead on arrival.

"The borrower and the guarantor decided to leave out a third party, the guarantor, when reaching an agreement. That contract is null and void. Consent is a vital component for any agreement to bind," Mr Olao said in an interview.

The advocate, however, warns that mobile phone service operators should also be on toes as they could be roped into privacy violation issues in the event someone listed as a guarantor opts to sue.

Mr Olao argues that mobile phone service operators should compel mobile phone lending platforms to seek guarantor consent before agreeing to issue any funds to borrowers.

Using subscriber's data

"Why should the mobile phone service provider allow other applications, which are third parties, to use subscriber data in confidence? The custodian of my private data is my service provider and this is something the telcos need to advance especially where third parties are using a subscriber's data without consent. The telcos should ensure that the third parties notify guarantors," Mr Olao added.

The use of data acquired in questionable means has brought sharp focus to mobile loans applications in recent months, even as the National Assembly considers a Bill to regulate such platforms and place them under the watch of the Central Bank of Kenya.

Initially, two bills were floated in Parliament by former Bonchari MP John Oroo Oyioka and Gideon Keter (nominated)  to regulate digital lending. But Mr Oyioka died on February 15, 2021. Under Kenyan laws, his Bill also died.

When Chinese billionaire Yahui Zhou acquired Norwegian web browser Opera for $1.23 billion (Sh133 billion) in 2016, the company had a lot of promise as it looked set to give the big boys in the industry like Google a run for their money.

At the time Mr Zhou acquired a controlling stake in Opera, the firm was listed in the Oslo stock exchange.

In 2018, Mr Zhou opted to list Opera in the New York-based Nasdaq bourse, and the move came as a breath of fresh air to several investors who were hoping to be part of the firm's quest to become the world's most popular web browser.

And why not? In 2017 Mr Zhou had led Opera into generating revenue of $128.9 million (Sh13.8 billion) through its various browsing products for desktops and mobile phones. This led the company to a $6.1 million (Sh654 million) profit.

At least 182 million people across the globe were using an Opera product on computer or phone once a month. Unknown to the incoming investors, that was as good as the fairytale got as Mr Zhou's diversification attempts and dalliance with Africa – Kenya and Nigeria to be specific – would play a role in Opera's downward spiral, and a landmark court battle between the company and its shareholders.

New venture

The Initial Public Offer (IPO) saw Opera raise $115 million dollars (Sh12.3 billion) from shareholders eager to see how the firm's managers would grow the browser business and hijack Google and Yandex.

The Nation could not immediately establish the exact number of investors that bought into Opera, but regulatory filings reveal that the firm sold 9.2 million shares each at $12 (Sh1,287).

A good chunk of the capital raised in the IPO instead ended up partially funding a new venture in Kenya – the Okash mobile loans application.

Okash's success saw Opera invest in two other similar applications – Opesa and Credit Hela – which offered unsecured loans of up to Sh50,000 to borrowers. The only catch was in the interest rates that borrowers were slapped with, and the methods used by Okash, Opera and Credit Hela to recover disbursed loans.

Opera owns the three firms through subsidiaries registered across the world, some in tax havens.
Opay Digital Services owns TenSpot Pesa and O-Stream Credit Limited,  which in turn own and operate the three digital lenders.

TenSpot Pesa runs Okash and Opesa, which started operations in 2018 and 2019 respectively.
O-Stream Credit owns and operates Credit Hela, which started operations in 2019.

The three lenders are notorious for breaching several privacy laws and regulations in recovering their debts.

Loan repayment

Repayment delays of as little as one day have seen lenders like Okash, Opesa, Credit Hela, Kashway and Ipesa invade individuals' phonebooks to retrieve contacts of borrowers' friends and relatives who are barraged with calls and text messages to shame individuals into loan repayment.

One borrower who spoke to the Nation said he borrowed Sh3,000 from Okash in February, 2018 to help cover for financial troubles brought about by his payment of school fees. He paid Sh800 before the loan repayment deadline.

To pressure *Peter (real name withheld) into repaying the Sh2,200 balance, Okash called his mother and sister. The Okash agent asked Peter's mother and sister, on at least five occasions, to tell him to repay the loan.

Eventually, Peter paid an additional Sh3,000 but by then the loan had risen to Sh9,000 on account of interest. Peter vowed never to pay the additional fee.

If an individual borrows Sh6,500 for instance, Okash charges a Sh1,191 in processing fees. The borrower will receive Sh5,309 but will be expected to repay the full Sh6,500 that will attract interest of up to 876 per cent per year.

When Opera was listing at Nasdaq, the firm disclosed some of its operation models and which have now raised red flags on how the firm could be illegally mining data from thousands of phones at a go.

Okash's artificial intelligence that largely runs the loans programme also grabs facial data of borrowers that use the application, the firm revealed in regulatory filings required before listing at Nasdaq.

Unfettered access

At first, Opera's lending business appeared viable, and within one year it accounted for approximately 42 per cent – nearly half – of the firm's revenue.

Last January, global firm Hindenburg Research published a damning report on Opera's mobile money lending business and how several borrowers were being socially shamed into repaying loans with unreasonable interest rates.

The research also pointed out the fine print consented to by borrowers and which granted Opera almost unfettered access to individuals' mobile phones.

The Digital Lenders Association of Kenya (DLAK), despite castigating the use of social shaming in debt recovery, insists that their members who use social shaming as a recovery tactic have not breached any laws as they acquired customer data through the legally provided means.

The Data Protection Act provides that companies can acquire customer data by asking the subject to consent to the move, and clearly stipulate what the information will be used for.

“Usually, customers consent to giving this data as part of the loan application process. The Data Protection Act 2019 clearly stipulates how business can acquire customer data, how to handle that data and what they can do with it. A data subject must consent before data is collected.” 

On the high interest rates, the DLAK insists that there are a number of factors that have contributed to the current status, including potential defaults by customers.