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Commentary on the Central Bank of Kenya (Amendment) Bill, 2021

2023-04-25

Commentary on the Central Bank of Kenya (Amendment) Bill, 2021

Introduction

The Kenyan National Assembly is currently in the process of reviewing the Central Bank of Kenya (Amendment) Bill, 2021 (the Bill). The Bill, published on 6th April 2021 as National Assembly Bill Number 10 of 2021 is currently on its second reading on the floor of the National Assembly. It aims to regulate the activities of digital lenders and protect the rights of customers of digital lending products.

Currently, there is no regulatory structure in place to regulate digital lending platforms. A fair and non-discriminatory loan market in Kenya is therefore a key mandate of the Central Bank of Kenya (the Bank). This short write up provides a brief commentary into the Bill’s provisions and its impact on FinTech space and digital lenders in particular in Kenya.

Background; 

Hon. Oroo Oyioka pioneered the initial efforts to modify the Central Bank of Kenya Act in order to subject Digital Lenders to government supervision in his sponsored Central Bank of Kenya (Amendment) Bill of June 19, 2020. On July 28, 2020, his Bill was debated at its first reading on the floor of the National Assembly. He suddenly passed away in February 2021, and the Bill appears to have stagnated since.

The second proposal was the Central Bank of Kenya (Amendment) Bill, which was introduced on November 30th, 2020 and was sponsored by Hon Gideon Keter. The Bill was introduced to parliament on February 25th, 2021, for its first reading on the floor of the National Assembly, and has yet to be presented for its second reading.

Hon Oroo Oyioka’s Bill

Hon. Oroo Oyioka’s Bill aimed to regulate and supervise “digital financial products and financial services.” The Bill attempted to subject not only digital credit providers, but also all other financial products on the market to the Central Bank of Kenya’s supervision. In this regard it is the mandate of the Bank, under the Bill, to regulate and supervise the conduct of providers of: – 

  1. digital financial products and services;
  2. digital credit providers and digital credit service providers;
  3. financial products and services; and
  4. financial services

The Bill proposes to define the terms mentioned above, including “Digital Facility,” as an arrangement or facility through which a person makes a digital financial investment, financial risk, or non-cash payment. The term “digital financial service” refers to the provision of a digital financial product, financial product advice, market, administrative, or management services, or credit under a regulated credit contract.

The definitions as captured may apply to a variety of products and services in the financial markets beyond those that are currently under the regulatory ambit of the Central Bank of Kenya. As a consequence, the Bill has been criticized as vague and lacking a clear focus with regards to the limit of its application to the digital lending space.

Hon Gideon Keter’s Bill

According to the Bill’s Memorandum and Objects, the proponents choose to focus on consumer welfare as the Bill’s primary objective, as they intend to “Safeguard the interests of consumers of the services of digital mobile money lenders.”

The bill seeks to achieve this by 

  1. Expanding the role of the CBK to license and regulate credit lenders
  2. Prohibit any entity from offering credit services to Kenyans without a license;
  3. Prescribe capital requirements for such lenders; and 
  4. Having the CBK publish a list of lenders by category in every quarter  

The Bill proposes to modify Section 2 of the Principal Act by inserting a definition of “Digital money lender” as an entity that provides credit using mobile money lending applications. The Bill also proposes to add Part VIIA to the main Act, which will legally require for the licensing of mobile money lending services. Under its provisions, digital money lenders would only be permitted to operate as such when licensed and authorized to do so by the Central Bank of Kenya.

The Bill outlines the procedure of applying for a license, as well as the precise requirements associated with the application, the licensing process, and renewal schedules. The Bill also states that every money lending company must be controlled by at least two directors. If the company is foreign-owned, one of the directors must be a Kenyan citizen, according to the Bill.

Contents of the 2021 Bill

  1. Definitions

Under the Bill, there are a number of new definitions inserted into Section 2 of the Central Bank Act (hereinafter referred to as the principal Act) including;

“digital channel” which under the Bill ought to include, the internet, mobile devices, computer equipment and any software/systems provided by Central Bank of Kenya (the “Bank”);

“digital credit” which denotes a digital credit facility or arrangement where money is lent or borrowed through digital channels;

“digital credit business” is the business of providing digital credit facilities or lending services;

“digital credit provider” signifies a person authorized by The Bank to engage in digital credit business;

“specified digital credit provider” is a licensed digital credit provider in the context of section 33R as proposed by the Bill.

These definitions seek to incorporate the digital lenders and processes into the Act and hence making them subject to the regulatory and supervisory roles of the Bank.

  1. Licensing and Supervision

Subsection (1) of Section 4A of the principal Act is proposed to be amended by introducing a new objective of the Bank immediately after paragraph (d). The Bank will be obligated to license and oversee digital credit companies not regulated under any other written legislation. This provision is important in distinguishing the digital lenders from the commercial banks that offer digital credit services. Whereas the digital lenders are currently not regulated under any laws in Kenya, commercial banks offering digital credit services are regulated by the Bank and hence the Bill does not apply to them.

Supervision: The Bill generally seeks to grant the Bank the authority to license, supervise, suspend or revoke a license, as well as authorize digital channels and business models for digital credit lending firms. In addition, the Bank will have the authority to impose minimum liquidity and capital adequacy criteria for digital credit providers.

Licensing: A person may not operate a digital credit company unless they have been granted a license by the Bank, under the principal Act; or the person is allowed to do so by another written law/regulation. An application for a license under the Bill must be made to the Bank in the relevant format and accompanied by the prescribed information and fee. 

Penalty for violation – It is instructive to note that the Bill provides for a severe punishment for any one in violation of the provisions therein being imprisonment for a term not exceeding three years or a fine not exceeding five million shillings (Kshs. 5,000,000.00), or both. This is to deter the unregulated proliferation of digital lenders who take advantage of the economic situation in the country to impose unconscionable terms on the unsuspecting borrowers leading to financial crisis in many households.

  1. Regulation

If necessary or expedient, the Bank may issue Regulations to carry out the provisions of the Act, including but not limited to; 

  • the registration & management requirements for digital credit businesses; 
  • permissible and prohibited activities; 
  • anti-money laundering and counter-terrorism financing measures; 
  • credit information sharing; 
  • data protection; consumer protection; 
  • reporting requirements for digital credit providers; 
  • offences and penalties; and
  • other measures necessary for digital lending regulation.

If the Bill is enacted, all current and active digital credit providers must register with the CBK within six (6) months of the Act taking effect. Furthermore, any rules and regulations must be issued within three (3) months after the Act’s enactment.

The requirement for regulations is a prudent measure in implementing the Bill. This will capture the actual intention of the Bill where the interest charged to borrower is disclosed or regulated, information is provided before the borrowers makes a decision, and the enforcement of the Data Protection laws is observed. The current circumstances in the country has seen many people receiving unsolicited offers to procure credit without any regard as to how the lenders have obtained the borrower’s information and how they are likely to use it. It is therefore imperative to ensure the best practice in line with international standards is observed in digital lending.

Conclusion

The enactment of the Bill into law is long awaited by the public as it is seen as the assured way to bring some order and sense of certainty in the digital lending space. The digital lenders on the other hand have been lobbying for self-regulation as opposed to the regulations through the Bank but the question always arises as to good will by the stakeholders. As of today, some digital lenders self-regulate under the Kenya Digital Lenders Association (DLAK) it is however not clear how robust are the measures and how much they have involved other stakeholders including consumer protection organizations.

The 2021 Bill is the most current attempt by Parliament to regulate digital credit service companies in the country. As currently drafted, the proposal would only affect credit service providers who were not subject to any other form of legislation. This for instance would preclude services offered by other commercial Banks that are currently regulated under the Banking Act and the principal Act. 

It will be interesting to see how the National Assembly progresses with the legislation in view of the intense lobbying by the digital lenders and hence the impact on the digital credit. The timing will also be important as the country is heading to an election year where the economy generally slows down leading to an increase in borrowing by the common man in order to meet the basic needs.

Isaiah Mungai Kamau, Joy Murugi Omulele and Omondi Patrick Oketch