Credit Management
Why Predatory Lending Is A Concern
By Wasilwa Miriongi
It is rare for one to visit social media sites like Facebook or YouTube without seeing an advert of cheap mobile loans, the question is are they really cheap to the word? Maybe not! Most of these lenders including many unregulated ones are known for engaging in predatory lending activities.
Prior to the creation of the law to regulate mobile lenders, there was a public outcry on the expansion of unregulated digital credit and their behavior like borrower shaming and contact tracing that violated both the privacy because of personal data abuse and dignity of the borrowers.
Predatory lending remains to be a huge concern for mankind in that the world’ s three biggest religions; Christianity, Islam and Judaism have express restrictions against charging interest on loans.
Islam seems to be the more explicit of all of them in that Islamic finance comes up with three major prohibitions namely the Prohibition of Riba( interest), Gharar( uncertainty) and Maysir( gambling). The
Prohibition of Riba( Interest) or trading in credit meaning that one of the main features of the Islamic financial system is the prohibition of the payment and receipt of Riba, which refers to any conditional increase in the principal of a loan or a debt in return for deferred payment. Generally, Riba includes all gains from loans and debts and anything over or above the principal of loans and debts, and covers all forms of interest on conventional commercial or personal loans. This does not mean by any means that Islamic finance does not recognize that time has a strong influence on economic activity and decisions. In fact, the juristic consensus permits the possibility of increasing the item’ s price for deferred payment in the case of sale contract.
From a historic perspective, in the predigital era, predatory lending took the form of loan sharks and shylocks who would go so far as dramatically auctioning one’ s very life in pursuit of recouping a loan. With the advent of the digital age, the Fintech industry has, by and large, taken up this place. Banks, Secret Investors, Saccos and
Predatory lenders practice equity stripping where they focus on the amount of the value in the borrower’ s property( say a home), and not on the borrower’ s ability to repay the loan. If a borrower’ s property has a high value, they may create a false sense of confidence in his ability to repay another loan.
just about anyone with some extra money in their hands and the know-how to build a mobile application have gotten into mobile lending.
Pricing and transparency have been the key concerns at the center of predatory lending. Predatory lenders take advantage of consumers by leading them into misinformed transactions where the loan turns out to be something other than what was promised.
Studies show the level of over-indebtedness in Kenya, especially concerning digital credit, is a growing concern, they have also indicated that a significant portion of borrowers are experiencing debt stress. Factors like low financial literacy, positive attitudes towards debt, and the rapid expansion of digital lending greatly contribute to this issue.
What Constitutes Predatory Lending?
For the sake of the reader what then constitutes predatory lending?
Predatory lenders practice equity stripping where they focus on the amount of the value in the borrower’ s property( say a home), and not on the borrower’ s ability to repay the loan. If a borrower’ s property has a high value, they may create a false sense of confidence in his ability to repay another loan.
They will overlook a bad credit score and that a borrower has been late on the last three mortgage payments as this will not matter to the lender. In fact, these are good signs for them because they indicate that the borrower may be strapped for cash, and more likely to sign the loan before thinking things through.
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