Nairobi, 23rd December 2021 – As announced, among others, via the website of the Central Bank of Kenya (CBK), the Central Bank of Kenya (Amendment) Bill, 2021, has become effective just a week before the New Year. With further regulations having been promised to be published on 23rd March, 2022 might truly hold ready some positive changes for digital lenders in Kenya. As TechCrunch highlighted, in the past ten years mobile lending apps have become very popular in Kenya, however app providers have ever since been struggling with the reality of “operating in an unregulated environment”. Customer privacy has too long been sacrificed with “digital lenders arbitrarily [having] shared user data with third parties” and debt-shaming having remained a rampant issue clashing with the idea that mobile lending leads to (financial) inclusion. This article will both provide some background information about mobile lending in Kenya, the adopted Central Bank of Kenya (Amendment) Act, 2021, and the draft Digital Credit Providers Regulations.
Mobile Lending in Kenya
As the Center for Financial Inclusion (CFI) emphasized in an article from June 2021, evidence suggests that “an increasing number of digital borrowers in Kenya [have become] over-indebted, which furthered them into poverty traps”. Whereas digital lending has offered short- and mid-term financial solutions and relief to many clients during the past decade, it has also caused long-term issues related to the ability to pay back and be fairly treated by digital service providers. As DLA Piper argued in March 2021, there indeed has been an urgent case for regulating digital lending in Kenya. Not only have lending companies violated borrowers’ right to privacy, for instance, by “send[ing] them targeted marketing messages”, but also have they threatened borrowers more directly to pay back while remaining in control of interest rates and, in some cases, in control of determining late payment fees much to the surprise of uninformed borrowers. Arguably, these practices – of which some violate the Data Protection Act 2019, neither contribute to inclusion nor to financial inclusion.
Whereas at first glance, the World Bank defines financial inclusion as related to the ability to “have access to useful and affordable financial products and services that meet [individual or business] needs”, it also highlights that financial access matters so much, because it can improve livelihoods (i.e. in terms of exiting poverty and accessing education, healthcare, self-employment etc.) and protect citizens in emergency situations such as the COVID-19 crisis. As such, one may argue that financial inclusion has the capacity to enhance social inclusion per se. Especially, since researchers pinpointed that higher levels of social inclusion in African countries coincide with higher levels of financial inclusion, it certainly appears like a progressive step that Kenya’s draft Digital Credit Providers Regulations are open to public feedback until March 2022. With 13,6% of adult citizens (18+) having taken up digital loans in 2017, and estimates by the Digital Lenders Association of Kenya (DLAK) suggesting “that digital lenders were issuing loans of up to Ksh. 4 billion per month before the Covid-19 pandemic”, their participation towards the draft regulations could reframe how ‘financial inclusion’ is being understood and addressed in policy-making.
Despite that Carole Kariuki, the CEO of the Kenya Private Sector Alliance (KEPSA), rightfully remarked that “‘[i]n less than 15 years Kenya has improved its [f]inancial [i]nclusion from just 26.7 percent to 82.9 percent thanks to increased mobile penetration’”, there might be a need to stop equating financial inclusion solely with short-and mid-term access to finance. According to the ‘Digital Kenya: Facts and figures from FinAccess 2019’ report from December 2019, which was published by Financial Sector Deepening (FSD) Kenya, “digital borrowers are nearly twice as likely to default on any loan” and experience significantly higher levels of debt stress. Whereas one may speculate that this could coincide with being misinformed about digital lending and digital credit providers (DCPs), the ‘State of Digital Lending In Kenya 2021’ report, which was published by DLAK last August, suggests that, at least a considerate amount of, uninformed Kenyans resort to not borrowing. Other reasons for not borrowing include being uninterested in DCPs (23%), other reasons (18%) and the fear of being harassed by the lender (12%).
Summed up, the following can be said about lending in Kenya in 2021: Most borrowers are male (59%), employed in the formal sector (65%), aged between 25-34 (46%) and interested in the ease of instant access to credit. However, workers in the informal sector, self-employed workers and students also increasingly take up digital credits. With others, unemployed citizens and informal workers being the most dissatisfied with DCPs, which as DLAK explains, is linked with the inability “to extend repayment period[s] and low loan limits”, it seems clearly beneficial that regulation is underway. First and foremost, new regulations should highlight the need for a realistic lending-borrowing set-up, which benefits clients and companies in the short-, mid- and long-term. A differentiation of equitable and transparent borrowing options must form the basis of the services of DCPs underlining the objective to stop debt shaming and hold companies accountable for violating data privacy law. Especially, because borrowers refrain from relying overly on relatives and other sources to access funding when they decide to take up services offered by DCPs, regulations must strictly forbid for DCPs to access information about the latter. The fact that borrowing systems change in society might tell us something about societal relationships – for instance that young workers, students and entrepreneurs no longer want to rely on their families to build up their businesses, respectively their future life. Accelerating financial independence is indispensable when aiming to achieve financial inclusion and adhering to strict data privacy standards protects not only clients, but also financial independence.
Central Bank Kenya (Amendment) Bill 2021
The Central Bank of Kenya (Amendment) Bill, which entered into force on 23rd December 2021, authorizes the CBK “to license and oversee the previously unregulated digital credit providers” as BitKe explains in an article from December 2021. As the Bill emphasizes, “[d]igital credit in Kenya has become a tool for granting formal credit for households and small businesses to manage their day-to-day expenses as well as manage weekly transactions”. Based on the growing fintech market in Kenya, so the Bill continues, the need for a “legal framework governing digital borrowing platforms”, which values fairness and non-discrimination, has arisen. The latter emphasis also underlines that the Central Bank of Kenya (Amendment) Bill first and foremost is a tool to protect citizens. Whereas such a bill may also allow certain DCPs to receive more public recognition, it might however reemphasize the need for smaller fintech start-ups to receive additional financial support as they go through a licensing process of 90 days.
Among others, the Central Bank of Kenya (Amendment) Bill reveals that the Departmental Committee on Finance and National Planning agreed to the DLAK’s proposals to base any future framework on global best practices and to dispense with the prudential requirement for digital lenders. Next to this, the Committee agreed with ECM Consulting Group LLP that licensing processes should be simplified in order “to create a conducive business environment” and that a register of licensed DCPs should be published on CBK’s website and in the Kenya Gazette. Both, the latter initiative and the adopted agreement to make it compulsory to inform customers adequately about credit pricing prior to loan applications, emphasize that the Committee indeed tries to make it easy for consumers to review the trustworthiness of a particular DSP. The latter was also underlined by the fact that the Committee rejected Alternative Circle Limited’s / Okolea’s / CM Advocates LLP’s suggestion to abstain from mentioning data protection issues in the Bill. Data protection and proper licensing are central.
The Central Bank of Kenya – Digital Credit Providers Regulations
The final version of the CKB Digital Credit Providers Regulations, to be developed and published by the CBK in March 2022 are still open for public discussion. If the draft version would be taken over on a one-to-one basis, the regulations would not affect institutions that are licensed under the Banking Act, which commenced in 1995, and the Microfinance Act, which commenced in 2006, among other institutions such as Sacco societies, the Kenya Post Office Savings Bank and “[c]redit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provision of services by the person” (§3e). To whom it concerns, the Digital Credit Providers Regulations would apply some of the following basic duties and rules:
- §4(2): A digital credit provider shall not invite or collect deposits in any form in the course of carrying out digital credit business.
- §5(1): No person shall establish or carry out digital credit business in Kenya or otherwise hold himself out as carrying out digital credit business unless licensed under the Act and these Regulations.
- §5(3): Any person who was at the commencement of these Regulations conducting digital credit business which is not regulated under any other written law shall apply to the Bank for a licence within six months of publication of these Regulations.
- §5(5): An applicant under sub-regulation (3) shall —
- (a) be a company incorporated under the Companies Act; and
- (b) ensure that its significant shareholders, directors and chief executive officer meet the fit and proper criteria set out in the Third Schedule.
- §12(1): A digital credit provider shall put in place appropriate policies, procedures and systems to ensure the confidentiality of customer information and transactions
- §12(2): A digital credit provider shall not share customer information with any person without the customer’s consent.
- §18: A digital credit provider shall not advance digital credit to a customer unless it has first taken reasonable steps to satisfy itself on the customer’s ability to repay the credit facility.
- §20: A digital credit provider, its officers, employees or agents shall not in the course of debt collection engage in any of the following conduct against the customer or any other person—
- (a) use of threat, or violence or other criminal means to physically harm the person, or his reputation or property;
- (b) use of obscene or profane language;
- (c) make unauthorized or unsolicited calls or messages to a customer’s contacts;
- (d) improper or unconscionable debt collection tactic, method or conduct
- (e) any other conduct whose consequence is to harass, oppress, or abuse any person in connection with the collection of a debt.
The draft Digital Credit Providers Regulations are already comparatively comprehensive. Among others, the above-mentioned rules and obligations of DCPs incorporate a view for data privacy and consumer protection. Additional measures to combat corruption are also included in the draft regulations, which require applicants under Article 5 Section 5 to draw up “proposed…Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) policies and procedures” (§6j) and foresee that DCPs “shall comply with the requirements of the Proceeds of Crime and Anti-Money Laundering Act, 2009, in conducting [their] business” (§30). Despite that the draft regulations foresee various administrative sanctions, they do not adequately specify which criteria will lead to a suspension or revocation of license (§35g) and how it will be dealt with potential cases of corruption in such a case taking into account victim compensation. Even if prudential requirements do not apply to fintech companies, it might be interesting to consider defining the duties of the CBK more clearly.
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