The rise of digital and online lending platforms in Kenya has transformed access to credit, providing convenience and speed in financial transactions. However, this transformation also brings to light various legal and ethical questions, particularly concerning the practices used by these lenders to recover unpaid loans.
One contentious issue is whether it is legal for digital and online lenders to contact the contacts of a borrower to pursue unpaid loans. This blog examines the legality of such practices in Kenya, citing relevant statutory provisions and recent case law to elucidate the legal principles involved.
LEGAL FRAMEWORK GOVERNING BORROWER PRIVACY
1. Data Protection and Privacy
The primary legal framework governing privacy and data protection in Kenya is the Data Protection Act, 2019. This Act regulates the collection, processing, and sharing of personal data, ensuring that individuals' personal information is handled with care and only for legitimate purposes.
Statutory Provision: Section 25 of the Data Protection Act mandates that personal data should not be disclosed to third parties without the consent of the data subject. This implies that digital lenders must obtain consent from borrowers before sharing their information with third parties, including their contacts.
2. Fair Debt Collection Practices
The Consumer Protection Act, 2012 sets out the principles of fair treatment in consumer transactions. Although it is not specific to digital lending, its principles extend to all forms of consumer credit, including digital loans.
Statutory Provision: Section 6 of the Consumer Protection Act prohibits unfair, deceptive, or coercive practices. Contacting a borrower's contacts to pursue unpaid loans may be deemed coercive if it causes undue pressure or distress to the borrower and their associates.
3. The Banking Act and Licensing Requirements
Digital lenders operating in Kenya are subject to the Banking Act, which mandates the licensing and regulation of financial institutions. While the Act primarily focuses on traditional banks, digital lenders must also comply with its provisions concerning fair lending and collection practices.
Statutory Provision: The Banking Act requires that financial institutions conduct themselves in a manner that is fair and transparent. Practices such as contacting a borrower’s contacts could be scrutinized under this requirement to ensure they do not contravene the principles of fair business conduct.
RECENT CASE LAW
Muthoni v. KCB Bank Kenya Ltd [2021] eKLR
In the case of Muthoni v. KCB Bank Kenya Ltd [2021] eKLR, the plaintiff challenged the bank's practice of contacting her personal contacts in pursuit of unpaid debts. The court examined whether this practice constituted a violation of privacy and fair treatment principles. The ruling emphasized the need for lenders to adhere to ethical standards and respect borrowers' privacy, suggesting that undue contact with third parties may be legally questionable.
2. Mwangi v. Safaricom PLC [2022] eKLR
In Mwangi v. Safaricom PLC [2022] eKLR, the plaintiff alleged that the digital lender's practice of contacting his relatives and friends to recover a debt was an invasion of privacy. The court underscored that while lenders have a right to pursue debt recovery, they must do so in a manner that respects the privacy and dignity of borrowers. The decision reinforced the need for digital lenders to balance their recovery efforts with respect for privacy.
DISCUSSION AND RECOMMENDATIONS
1. Legality of Contacting Borrowers’ Contacts
Based on the Data Protection Act and Consumer Protection Act, contacting a borrower’s contacts without their consent could be a breach of privacy and fair practice principles. Digital lenders should ensure that their debt recovery practices comply with these legal standards to avoid potential legal repercussions.
2. Recommendations for Digital Lenders
Obtain Explicit Consent: Digital lenders should seek explicit consent from borrowers before sharing their information with third parties, including their contacts. This consent should be clearly documented to ensure compliance with the Data Protection Act.
Establish Clear Guidelines: Lenders should develop and adhere to clear internal guidelines regarding the methods of debt collection. These guidelines should prioritize borrower privacy and minimize undue pressure on their contacts.
Educate Borrowers: Providing borrowers with clear information about the consequences of default and the practices employed by lenders can help manage expectations and avoid disputes.
3. Need for Legislative Reform
There is a growing need for specific regulations governing digital lending practices to address issues related to privacy and debt collection. Legislative reforms could include:
Enhanced Privacy Protections: Updating the Data Protection Act to include specific provisions for digital lending practices.
Clear Debt Collection Standards: Introducing regulations that define acceptable debt collection practices for digital lenders to ensure they do not violate privacy or fair treatment principles.
CONCLUSION
The legality of digital and online lenders contacting borrowers' contacts for unpaid loans is a complex issue that intersects with data privacy, consumer protection, and fair lending practices.
While existing laws provide a foundation for regulating these practices, there is a need for clearer guidelines and legislative reforms to address the specific challenges posed by digital lending.
By adhering to legal standards and prioritizing ethical practices, digital lenders can ensure that their operations are both effective and respectful of borrowers' rights.
REFERENCES
1. Data Protection Act, 2019, Laws of Kenya. http://www.kenyalaw.org/kl/
2. Consumer Protection Act, 2012, Laws of Kenya. http://www.kenyalaw.org/kl/
3. Banking Act, Cap 488, Laws of Kenya. http://www.kenyalaw.org/kl/
4. Muthoni v. KCB Bank Kenya Ltd [2021] eKLR. https://kenyalaw.org/caselaw/
5. Mwangi v. Safaricom PLC [2022] eKLR. https://kenyalaw.org/caselaw/
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Centre for Legal Research & Policy Development is a participating consultancy within The SLS Group.
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