Commentary on the proposed regulation of digital lending in Kenya

Introduction

The Kenyan National Assembly is in the process of reviewing the Central Bank of Kenya (Amendment) Bill, 2020 (the Bill) that seeks to regulate the business of digital lenders and safeguard the interests of consumers of digital lending products. This alert comments on the contents of the Bill.

Context

Non-deposit taking credit only providers (in this alert “credit only lenders”) have remained largely unregulated for a long time in Kenya. The most popular credit only lenders are digital lenders. According to a report by the Financial Sector Deepening Kenya, digital lending is attractive to Kenyan consumers due to widespread use of mobile phones in Kenya. The report also notes that digital lending gives borrowers a quick and convenient option for credit compared to the more formal and stringent lending formalities by traditional lenders such as banks.

The growth of consumerism in Kenya has however generated debate regarding the business of unregulated credit only lenders. The lenders have been accused of taking advantage of the dire need for credit access by the bottom of the pyramid population and the lack of regulation in this space to engage in unethical practices such as predatory lending, data breaches and imposition of usurious interest rates. To curb these alleged malpractices, the Kenyan public has urged regulators and legislators to promulgate laws to regulate credit only lenders.

This is not the first time that a law to regulate credit only lenders is being proposed in Kenya. In 2018, the National Treasury prepared the draft Financial Markets Conduct Bill, 2018 which sought to, among other things, regulate consumer credit providers. This 2018 bill has however never been passed.

Contents of the Bill

The Bill proposes to amend the Central Bank of Kenya Act (No. 491 laws of Kenya) (CBK Act) to introduce the changes indicated below.

• Mandatory licensing of digital money lenders

The Bill requires every person intending to undertake the business of a digital money lender to first obtain a licence from the Central Bank of Kenya (CBK). A digital money lender is defined in the Bill as an entity that offers credit facilities in the form of mobile money lending applications. An applicant must meet certain requirements, including incorporation as a company and minimum capital to be prescribed by CBK. An applicant will also be required to provide to CBK the agreement it has with the telecommunication services provider on whose platform the applicant intends to provide the digital lending services together with the proposed terms of use of the digital lending service to be given to its customers.

The Bill also requires CBK to publish a list of all licenced digital money lenders in the Kenya Gazette.

• Management of digital money lending institutions

The Bill requires every licenced digital money lender to have at least two directors and where the lender is foreign owned, one of the directors must be a Kenyan citizen.

• Declaration of Interest rates

Every licenced digital money lender will be required to expressly announce its interest rates when advertising its services.

Our Commentary on the Bill

Regulation of credit only lenders in Kenya is certainly inevitable owing to the concerted efforts by consumer groups, legislators, and credit only lenders themselves to address concerns that credit only lenders engage in predatory lending, data breaches and charging of unconscionable interest rates. As of today, some digital lenders self-regulate themselves through the Digital Lenders Association of Kenya (DLAK).

Before introducing any proposed legislation is Parliament, the practice is for the sponsor of the legislation to provide a memorandum of the objects and reasons in support of the legislation. The memorandum in support of this Bill shows that the intention is to ensure that all credit only lenders in Kenya are licenced and regulated by CBK. The Bill however as currently drafted seeks to make amendments to the CBK Act to regulate digital money lenders only.

In some jurisdictions, credit only lenders are regulated under a specific statute to avoid overlap of regulations and laws with other regulated financial services. Uganda for instance has the Money Lenders (Money Lenders) Regulations, 2018. As currently drafted, the Bill will in our view require a bank or a microfinance institution already licenced by CBK to procure a separate license to provide its loan products through a mobile application. This does not assist with the ease of doing business in Kenya for banks and microfinance institutions. There is need therefore to re-examine the way the Bill is drafted to address such lapses.

We will be monitoring and updating you on the developments as the Bill goes through the legislative process in the National Assembly.

If you have any queries regarding the Bill or the general banking and finance practice area, please do not hesitate to contact Peter Mwaura at pmwaura@mwc.legal. Please note that this e-alert is meant for general information only and should not be relied on without seeking specific subject matter legal advice.