The Bank of Tanzania (BoT) is intensifying its efforts to regulate digital lending in the country, targeting unlicensed operators in an industry that has rapidly gained traction. The move seeks to protect consumers, maintain market stability, and uphold ethical practices within the digital microfinance sector.

BoT’s Crackdown and Licensing Requirements

As of November 14, the BoT had approved only four out of 20 formal license applications for digital lending operations under new, stricter guidelines introduced in August 2024. These guidelines aim to address challenges such as exorbitant interest rates, unethical debt recovery practices, and breaches of consumer data privacy.

In collaboration with the Tanzania Communications Regulatory Authority (TCRA), the BoT identified and began shutting down 69 unlicensed digital lenders operating through mobile apps. The central bank emphasized that these entities were in violation of the 2018 Microfinance Act, jeopardizing consumer welfare and the integrity of legitimate financial services.

Tier 2 Microfinance Providers

Digital lenders in Tanzania fall under Tier 2 microfinance service providers, which encompass non-deposit-taking institutions. This category is distinct from Tier 1 (microfinance banks), Tier 3 (Savings and Credit Cooperative Societies or SACCOS), and Tier 4 (community-based microfinance groups).

The BoT’s August guidance introduced several critical measures:

• Caps on Loan Fees and Charges: Lenders must adhere to transparent pricing structures.
• Ethical Debt Recovery Practices: Prohibited actions include harassment, abusive language, and physical assault.
• Data Privacy Protections: Stricter regulations to safeguard customer information.
• Consumer Complaint Mechanism: A dedicated desk at the BoT now addresses borrower complaints.

Market Challenges and Consumer Concerns

BoT Assistant Manager for Microfinance, Mary Ngassa, highlighted that unethical practices among some digital lenders, such as aggressive debt collection tactics and public harassment of borrowers, were prevalent. These behaviors not only harm individuals but also undermine public trust in microfinance institutions.

Excessive fees, lack of interest rate transparency, and short repayment periods were also cited as significant issues. These practices increase financial vulnerability among borrowers, often leading to a cycle of debt.

BoT Acting Manager for Microfinance Supervision, Dickson Gama, stressed that addressing these challenges is crucial to restoring the credibility of the sector and ensuring consumer protection.

The Popularity of Digital Lending

Digital lending has surged in Tanzania, largely due to the convenience it offers. Unlike traditional banks, digital lenders provide quick access to funds through websites and mobile applications. This efficiency has made these services particularly attractive to individuals and small businesses facing urgent financial needs.

The increasing adoption of smartphones, combined with advancements in financial technology, has further fueled the growth of digital lending platforms. Despite their advantages, these platforms often operate with minimal oversight, exposing users to predatory practices.

Public Awareness and Future Initiatives

To combat the proliferation of unlicensed lenders, the BoT plans to launch initiatives aimed at increasing public awareness of services offered by licensed providers. This will include educational campaigns on identifying authorized lenders and understanding the risks associated with unregulated platforms.

Additionally, the BoT is working on further measures to enhance the regulatory framework. These may include integrating digital lending operations with broader financial systems to improve transparency and accountability.

Regional Context

Tanzania’s crackdown on unlicensed digital lenders is part of a broader trend in Africa, where governments are grappling with the rapid growth of financial technology. Countries such as Kenya and Nigeria have faced similar challenges and implemented regulations to curb malpractice in the digital lending space.

In Kenya, for example, the Digital Lenders Association of Kenya (DLAK) has been instrumental in setting industry standards. Similarly, Nigeria’s central bank introduced a licensing framework for fintech companies, aiming to create a balance between innovation and consumer protection.

The Way Forward

The BoT’s actions mark a significant step toward fostering a more secure and ethical digital lending environment in Tanzania. However, sustained efforts will be required to fully address the challenges posed by unregulated operators.

Collaboration between regulatory bodies, financial institutions, and technology providers will be essential in achieving this goal. By striking the right balance between innovation and oversight, Tanzania can unlock the potential of digital finance while safeguarding the interests of its citizens.

Conclusion

The rise of digital lending in Tanzania reflects the transformative power of technology in expanding financial access. However, without proper regulation, this innovation risks being undermined by unethical practices and consumer exploitation.

The BoT’s crackdown serves as a reminder of the importance of regulatory frameworks in fostering trust and stability in the financial sector. As the country continues to embrace digital finance, ensuring that these services operate within the bounds of the law will be critical to their long-term success.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

26th November, 2024