EFFECTS OF DIGITAL CREDIT PROVIDERS ON FINANCIAL INCLUSION OF LOW-INCOME YOUTH IN NAIROBI AND THE NEED FOR GOVERNMENT REGULATION
Keywords:
Digital channels, Digital Credit, Digital Financial Services, Financial Inclusion, Fintech, Credit, Digital Credit Providers.Abstract
This study researched on the effects of Digital Credit Providers (DCPs) on financial inclusion among the low-income youth in Nairobi, Kenya, and the need for Government regulation in the sector. The study was guided by three dependent variables and one moderating variable. Employing a descriptive research design and quantitative methodology, the study collected data from 380 participants from ten wards in Nairobi drawn from a youth population of 338,669 from the same wards. The data analysis employed descriptive statistics on frequency distributions, means, and standard deviations to analyse the direct effects of DCPs on financial inclusion, the positive and negative impacts/ spillover effects of DCPs, and justification for Government regulation. The findings revealed male youths aged between 18 to 25 years were predominately engaged in digital borrowing to meet their day-to-day and lifestyle needs. Respondents largely perceive digital credit providers as catalysts for improved financial inclusion, especially for youth marginalized by traditional banking systems. Additionally, many youth respondents acknowledged positive impacts such as increased access to financing, employment opportunities, and enhanced financial autonomy as some of the effects of digital credit. One negative impact, the study identified punitive cost of credit, punitive cost of default, moral hazard, and over-indebtedness as the negative impact of digital credit among low-income youth. A significant portion of respondents held multiple digital loans, with many listed in Credit Reference Bureaus (CRBs) due to defaults while others reduced their spending and borrowed from family and friends to repay digital credit. Finally, the study advocates for government regulation to safeguard consumers from potential exploitation by DCPs, improve data protection and transparency and promote sustainable financial inclusion. Whereas non-regulation or regulatory gaps may favour DCPs, they can expose youths in Nairobi to financial exploitation by the DCPs and reliance on debt to survive and meet their personal needs. Government regulation and supervision are important to establish minimum standards ensuring consumer protection, and ways of working, and provide legal recourse to aggrieved youth customers. The study also contends that regulatory frameworks should be flexible to accommodate digital credit technology advancements and the development of products for diverse consumer needs, thereby promoting responsible lending practices and financial inclusion.
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