New Guidance Note for Digital Lenders in Tanzania under Tier 2 Microfinance Service Providers.

By Sunday Ndamugoba

Key Highlights:

  • Stricter Licensing Requirements: Digital lenders must be licensed as Tier 2 Microfinance Service Providers and adhere to new operational standards.
  • Consumer Protection Focus: Enhanced measures to safeguard consumer data and prevent abusive lending practices.
  • Transparent Operations Mandated: Clear display of interest rates, fees, and penalties on digital platforms is required for consumer awareness.
  • Prohibited Practices Defined: Restrictions on data access and the operationalization of non-approved lending policies.

Introduction

The microfinance sector in Tanzania is undergoing transformative changes driven by the rapid adoption of digital loan services. This growth, fueled by technological advancements and increasing consumer demand for swift and hassle-free credit, has the potential to enhance financial inclusion and stimulate economic development. However, it also brings significant challenges, including issues related to high fees, abusive debt recovery practices, inadequate identification of service providers, and data privacy concerns.

In light of these challenges, the Bank of Tanzania has issued a guidance note for digital lenders operating under Tier 2 Microfinance Service Providers as of 27th August 2024. This guidance is designed to promote adherence to consumer protection principles, improve market transparency, and bolster the credibility of the microfinance sector. This article explores the main components of the guidance, their implications for digital lenders, and the broader impact on consumers.

Definition of Key Terms

Understanding the definitions of critical terms is essential for compliance with the new guidelines:

Digital Lenders: Microfinance service providers that conduct lending activities entirely through digital channels, encompassing the entire loan lifecycle—from application and approval to disbursement and repayment.

Digital Lending Platform: An online or mobile interface that facilitates digital loan products and services, enabling lenders to reach a broader audience.

Electronic Know Your Customer (e-KYC): A digital process for verifying customer identities, utilizing technology to streamline the verification process while minimizing the need for physical documentation.

These definitions set the groundwork for the operational standards that digital lenders must meet.

Minimum Criteria for Digital Lenders

To operate legally, digital lenders must meet several stringent criteria:

  1. Licensing Requirements:

Digital lenders must be licensed as Tier 2 Microfinance Service Providers under Section 16(1) of the Microfinance Act, 2018. This step ensures only vetted institutions engage in digital lending.

  • Secure Digital Lending Platforms:

Lenders must develop robust, secure platforms that protect customer data and comply with the Personal Data Protection Act, 2022. Key features include:

  • Obtaining explicit consent from users for data collection.
  • Limiting data access permissions and ensuring they are revoked after the lending relationship ends.
  • Sending transaction messages that clearly identify the lending institution.
  • Transparency in Operations:

Digital lending platforms must prominently display information regarding:

  • Interest rates, fees, and charges associated with loan products.
  • Loan limits, payment frequencies, and penalties for late payments.
  • This transparency is crucial for building consumer trust and enabling informed decision-making.
  • Language and Accessibility:

Platforms must operate in Kiswahili or a bilingual format, with Kiswahili as the default language. This requirement ensures accessibility to a wider population and improves understanding among consumers.

Documentation for No Objection Requests

Existing licensed microfinance providers intending to offer digital loan services must submit a no objection request to the Bank. The application must include:

  1.  Detailed descriptions of the digital lending platform, along with process flows and user interface screenshots.
  2. A comprehensive lending policy that includes all digital loan products and services.
  3.  Certification from the Personal Data Protection Commission (PDPC) confirming compliance with data protection regulations.

This documentation process is designed to ensure that only compliant and responsible providers enter the digital lending space.

Prohibited Activities

The guidance note explicitly outlines activities that are prohibited for microfinance service providers, including:

  1.  Limitation on Platforms:

A microfinance service provider may only operate one digital lending platform, although it can offer multiple loan products through that platform.

  • Data Privacy Violations:

Accessing customers’ personal data, such as contact lists and messages, for e-KYC or delinquency management is strictly forbidden. This measure is intended to protect consumer privacy and prevent data misuse.

  • Unauthorized Data Sharing:

Lenders are prohibited from sharing customer data with entities outside Tanzania, except for necessary maintenance and improvements to the digital platform.

  • Non-compliant Lending Practices:

Lenders must not operationalize lending policies that have not received prior approval from the Bank, ensuring that all lending activities adhere to established regulations.

Submission of Period Reports

In addition to the above requirements, digital lenders will be required to submit periodic reports on their lending operations. This requirement will foster accountability and enable the Bank of Tanzania to monitor compliance effectively, ensuring that lenders operate within the established framework.

Conclusion

The recent guidelines from the Bank of Tanzania represent a pivotal move toward establishing a more regulated and consumer-friendly digital lending environment. By enforcing stringent licensing requirements, enhancing consumer protection measures, and promoting transparency in operations, these regulations aim to elevate the standards of digital lending in Tanzania. The Guidelines also provide under annexures with Application for a No Objection Letter to Offer Digital Loan Products and Services by Tier 2 Microfinance Service Provider and Questionnaire for microfinance service providers requesting for no objection letter to offer digital loan products and services

Digital lenders must take proactive steps to comply with these guidelines to maintain their operational licenses and build consumer trust. For consumers, these measures promise a safer and more transparent borrowing experience, ultimately enhancing the credibility of the microfinance sector and contributing positively to financial inclusion in Tanzania.

As the digital lending landscape continues to evolve, stakeholders must remain vigilant and adaptive to ensure that the benefits of technological advancements are realized without compromising consumer rights and market integrity.

Microfinance Service Providers carrying out or intending to carry out digital lending business to ensure compliance with the requirements outlined in the Guidance Note. Failure to comply with this directive will result into administrative sanctions including penalties, suspension of digital lending and revocation of microfinance Tier 2 business license. The Bank will publish and regularly update the list of approved Tier 2 Microfinance Service Providers offering digital loan products and services on its website.

Please see attached the report: https://www.bot.go.tz/Publications/Acts,%20Regulations,%20Circulars,%20Guidelines/Guidelines/en/2024082813141188.pdf

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