Bank of Tanzania moves to rein in digital lenders

Dar es Salaam. The Bank of Tanzania (BoT) has taken decisive action to regulate loans issued by non-deposit-taking digital microfinance service providers.

This initiative comes in response to nearly two years of escalating concerns regarding online loans, which have been marked by inadequate oversight and poorly structured operations.

In this context, the BoT issued a Guidance Note on August 27, 2024, aimed at regulating digital lenders classified under Tier 2 Microfinance Service Providers.

Tanzania's microfinance legislation categorises digital lending into two tiers: Tier 1 encompasses microfinance banks that accept deposits and issue loans, such as Finca, while Tier 2 consists of non-deposit-taking microfinance institutions that solely provide loans without accepting deposits.

According to a statement signed by BoT Deputy Governor, Dr Yamungu Kayandabila, the Guidance Note seeks to enhance the supervision of digital lending practices within Tier 2 microfinance service providers.

It aims to ensure compliance with financial consumer protection regulations, which include transparency, pricing, debt collection practices, and the safeguarding of personal data and customer privacy.

"Following the issuance of the Guidance Note, the Bank of Tanzania directs all Tier 2 microfinance service providers engaged in digital lending to comply with its requirements," the statement, released on September 25, 2024, indicated.

Noncompliance may result in administrative sanctions, including penalties, suspension of digital lending activities, and the potential revocation of microfinance Tier 2 licenses.

Mr Deogratias Mnyamani, Principal Officer from the Directorate of Financial Sector Management, elaborated on the Guidance Note, stating that these guidelines were developed in response to the oversight challenges associated with online loans, which have increasingly become problematic.

He emphasised that digital loans must adhere to established procedures, as mandated by the Microfinance Act, which requires that all small financial activities be licensed by the BoT.

"Regrettably, many online lending operations either disregard these regulations or operate without the necessary licenses. Individuals can easily create applications to offer loans, while licensed providers often fail to meet compliance standards. This has led to a distortion of consumer protection measures, resulting in contracts that lack transparency, unclear repayment schedules, and ambiguous late fees," he remarked.

Mnyamani further noted that borrowers are sometimes pressured to repay a three-month loan within a mere seven days, risking humiliation should they fail to comply.

This lack of transparency and procedural violations not only jeopardise consumer rights but also undermine individuals' dignity.

Currently, there is no available data regarding the number of Tier 2 digital lenders operating in the country.

"This is why we have directed them to come forward and identify themselves, enabling us to recognise their operations," he stated. Mnyamani highlighted that the loans offered by these institutions are not guided, relying solely on their capacity to provide loans ranging from hundreds to millions.

Through these new regulations, the Bank of Tanzania aims to foster a more secure and transparent environment for digital lending, ultimately protecting consumers and enhancing the integrity of the microfinance sector.