What are Digital Lending Apps?

A Digital Lending App is a mobile and/or web-based application that enables a consumer to borrow funds from a digital lender. These platforms are characterised by being seamless, lacking paperwork and cumbersome bureaucratic processes, usually not requiring collateral, and reaching a decision in a matter of minutes.

What are the benefits of Digital Lending Apps?

Digital Lending has increased in popularity in Africa, where around half of the population is unbanked, according to the World Economic Forum. These platforms have disrupted traditional banking and financial services systems that have historically hindered individuals from accessing credit. The ability of more groups to participate in this form of lending has brought about significant economic and social gains, providing access to funds for more individuals and small and medium-sized enterprises across the region. However, despite these platforms’ gains towards financial inclusion, the challenges and risks to human and digital rights, which have emerged from their popularity in the region, cannot be ignored. 

What risks are posed by these platforms?

In recent years reports have emerged of unethical practices employed by online lenders, even leading authorities and regulators to step in. For example, in February 2020 Sheila M’Mbijjewe, the Deputy Governor of the Central Bank of Kenya highlighted the risks to consumers from high interest rates, over-indebtedness, and harassment of customers by unethical online lenders. In Nigeria, authorities also shut down the offices of online lenders which were found to be operating illegally in the country, in October 2022. And in August 2024, the Uganda Microfinance Regulatory Authority went as far as publishing a list of 59 Digital Lending Apps which it cautioned were unauthorised to operate in the country. It noted that customers face risks from these lenders, including intimidation, as well as a lack of protection of their sensitive data. Some emerging challenges include:

Regulatory gaps and opaqueness: The rate of expansion of App-based loan services is far outpacing the efforts to adequately and efficiently regulate them in a number of countries in Africa. As a result, the region is seeing an increasing number of consumer defaults and subsequent malpractice by unethical lenders, exploiting the lack of or gaps in regulation. Predatory lenders often take advantage of regulatory weakness by employing “misleading or unethical practices and false claims,” and these can take the form of undisclosed fees and/or interest rates, balloon payments, or constant encouragement to acquire additional loans.

Moreover, despite the presence of laws in many countries, to protect citizens’ rights to privacy, confidentiality, and protection of their data, multiple reports have emerged of digital lenders gaining access to borrowers’ phone contacts and media galleries, as well as illegally sharing this data with others, and even selling, customers’ personal information on to third parties. 

Over-indebtedness: Many African countries are facing economic crises that have negative impacts on the population. This has seen people pushed into challenging financial situations and exacerbated their reliance on digital lending apps, even to meet basic everyday costs. As such, more people are finding themselves over-indebted and unable to repay their loans on these digital platforms. South Africa’s National Debt Review Center considers a consumer to be over-indebted “if money available after payment of essential expenses is not enough to pay all other debts.”

Social, Professional, and Emotional Harm: Across the region, an increasing number of reports are emerging of incessant harassment of customers by agents of loan recovery companies. These tactics can include but are not limited to verbally abusive phone calls and text messages, physical violence, blackmail, extortion, illegally accessing customers’ personal data, and even divulging customers’ indebtedness to their families, friends, and employers. 

How can I protect myself when making use of digital lending platforms?

A key limitation for consumer protection in the credit space is that many countries still do not have robust credit bureaus where lenders (and borrowers alike) can access information regarding the latter’s credit record and level of indebtedness. 

However, before applying for any loan, it is important for a potential borrower to understand their financial capacity to obtain the debt and make payments on the principal as well as the interest. Once you determine your level of indebtedness, you will be in a better position to decide whether or not it is advisable to take on a loan. 

A few signs that you may not be able to afford a loan include:

• Not remembering your existing creditors off the top of your head;
• Borrowing money to pay other debts; 
• Relying on credit to make everyday purchases (such as groceries or transport costs);
• The majority of your income is taken up by debt repayments;
• Missing debt repayments altogether;
• Receiving letters of demand and/or summonses from creditors; and,
• A regular feeling of emotional stress regarding finances.

One can also estimate loan affordability by calculating your debt-to-income ratio (DTI). This is the total monthly debt payments divided by the total gross monthly income. A DTI of over 50% can signal that a potential borrower will struggle to repay a loan. 

Due Diligence: Digital lenders provide a wide array of “hassle-free” online loans that can be so easily accessible and promise money in an instant. Thus, signing up without doing due diligence on the lender can be very tempting. However, it is important to take some precautions, such as conducting a web search to determine the company’s true existence, its location, legal registration, as well as testimonials or reviews from customers. You should also read through the terms and conditions for the loan and ask for advice or guidance if there are terms you do not understand. Also, compare loan offers across a few lenders to make the best decision. 

What recourse do I have when I face challenges with unethical digital lenders?

Do not suffer in silence: Unethical money lenders prey on a customer’s shame and fear of public embarrassment. If you are being harassed and threatened over the money you obtained digitally, seek help urgently. This is also the case where an online money lender has used your personal information unethically. 

To begin with, a number of the retaliatory tactics employed by unethical digital lenders are illegal under the laws of many countries. Report these violations to the police and cooperate with their investigation and processes.

You can also reach out to Paradigm Initiative through Ripoti, a dedicated platform for the reporting of digital rights violations taking place on the continent. We are dedicated to safeguarding the principles of digital freedom and our mission is to document, respond to, and address digital rights violations. You can be assured that your information will be treated with the utmost respect, and your identity will not be made public. Also feel free to make use of Ayeta, our digital rights toolkit which provides digital security tips and measures that can be taken to protect against potential threats. 

Lastly, it can also be helpful to make use of resources that provide financial literacy education and support for managing debts and finances so as to ensure you can leverage ethical online lenders to improve your financial standing. 

Author: Chiti Mbizule Mutati, Southern Africa Programme Officer, Paradigm Initiative