Regulating Digital Lending in Kenya: Where the C.B.K (Amendment) Bill, 2021 falls short

Overview of Lending in Kenya

Digital lending is big in Kenya. A simple search of the word ‘loan’ on the Google Play Store reveals over 240 apps with Kenyans accessing on average 36 million in short term loans a month.

The uptake of these loans is driven by most citizens lacking collateral for deposit taking loans, coupled with the rapid adoption of mobile money and general use of mobile phones in the region, with 91% mobile penetration against the 80% African average.

Although these platforms create a promise of financial inclusion for the majority of Kenyans, it is often a clouded one. Exorbitant interest rates, data privacy violations, and the absence of a regulatory framework with clear avenues for redress has backed consumers into a corner.

The 2019 FSD Kenya FinAccess Survey found that digital borrowers are more likely to show signs of debt stress than other formal borrowers, with nearly 1 in 2 digital borrowers having to borrow more, sell assets, reduce expenditure on food or take a child out of school to repay a loan.

These digital lending platforms boast high interest rates with some averaging a staggering 521% annually compared to the bank lending interest rate of 12% per annum as of December 2020. On the other hand, digital lenders collect sensitive data including location, text messages, call records and more shockingly, a user’s phonebook contacts; with some going as far as threatening consumers contacts upon default.

Regulatory Interventions

Attempts at regulating Kenya’s digital lending landscape go as far back as 2018 with the publication of the Financial Market Conduct Bill (FIMCA). The Bill sought to promote a fair, non-discriminatory marketplace for access to credit by establishing uniform practices and standards in relation to the conduct of providers of financial products and financial services, and regulating the cost of credit. The Bill also proposed the establishment of a statutory body; the Financial Markets Conduct Authority, granting it regulatory and supervisory powers. This move was shunned upon by many, with most faulting it for  reaching into the Central Banks mandate through the proposed Authority.

The Central Bank of Kenya (Amendment) Bill, 2020 came to remedy this by expanding the Bank's jurisdiction to include digital financial products and services. This Bill never made it to the floor of the House, with no talk of it past the initial stages.

In a move to self-regulate, the Digital Lenders Association of Kenya (DLAK) has published its Code of Conduct. The Code of Conduct applies to DLAK’s 17 members and seeks to create acceptable standards of conduct by all Digital Lending Institutions, all towards consumer protection and satisfaction.

The Proposed Legislation

In April this year, Parliament published the Central Bank of Kenya (Amendment) Bill, 2021. The latest attempt at regulation seeks to; provide for licensing of digital credit service providers, who are not regulated under any other law.

Despite the clear objectives laid out in its memorandum, the Bill falls short in the following areas:

a. Definition of Digital Credit

The Central Bank of Kenya (Amendment) Bill, 2021 defines digital credit as, a credit facility or arrangement where money is lent or borrowed through a digital channel.

From the reading of the definition, it is unclear whether the Bill seeks to regulate both deposit taking and non-deposit taking entities leveraging online platforms to provide access to credit.

The definition also fails to clarify if the amendments apply to all fintech platform financing entities including; fintech balance sheet lending, crowdfunding platforms.

The definition of digital credit can be summarized into three main elements:

a. The aspect of lending

b. The presence of an online platform

c. The reliance on equity capital to fund the lending

The definition under the Bill misses out on one important element; the reliance on equity capital. This has the potential of subjecting fintech balance sheet lending, crowdfunding platforms and deposit taking entities such as banks operating through digital channels to additional licensing processes.

Take an online banking app that allows customers to access loans via the platform for example. Banks in Kenya are regulated by the Central Bank of Kenya as provided for under sec. 5 of the Banking Act. The Act requires that all institutions must obtain a license from the Central Bank in order to carry on business. One wonders whether licensed banks with technology enabled business models will be required to obtain the digital credit business license envisioned under the proposed law.

The proposed definition also brings crowdfunding platforms under the scope of the Bill. The Bank for International Settlements (BIS) recognises the existence of two types of crowdfunding platforms; loan crowdfunding and equity crowdfunding. 

Debt crowdfunding allows funders (lenders) to directly lend to fundraisers or invest in debt obligations issued through a platform, while equity or investor based crowdfunding allows individual and institutional investors to invest in unlisted entities (issuers) in exchange for shares in the entity. 

By its definition, the Bill proposes to regulate crowdfunding platforms; more specifically loan crowdfunding platforms that operate by lending.

b. Liquidity Requirements

The challenge in defining digital credit creates more loopholes around minimum liquidity requirements.

The Proposed Legislation gives The Bank power to set minimum liquidity requirements for digital credit platforms in its clause. 33R (c).

This provision cannot apply to non-deposit taking platforms as they do not engage in maturity transformation.

Brazil’s Resolution CMN 4,656 is one of the few legislations that provide for regulation of digital credit companies. As it stands, the Resolution does not permit these companies to raise funds from the public unless through issuing of shares. This model restates the nature of these platforms and the reliance on their own balance sheets to fund lending.

If the scope of digital credit is redefined to apply only to non-deposit taking digital credit providers, then the provisions under this clause cannot be applicable.

c. Registration and Licensing

The CBK (Amendment) Bill, 2021 requires that, any person who, before the coming into force of this Act, was in the-business of providing credit facilities or loan services through a digital channel and is not regulated under any other law, shall register with The Bank within six months of coming into force of this Act

There is a need for a provision that allows entities access to restricted licenses in the event that the process takes longer than the 6 months envisioned under the proposed amendments. This is crucial in allowing business continuity while ensuring compliance.

What Next?

As it stands, the Bill provides the most foundational stages of regulation by recognising the existence of these unique financial institutions, and the need to properly define them before delving further into the procedures and requirements. The foundational stage on which the rest of the law is anchored is the most important. A misstep has the potential of creating a regulatory gap by prioritizing licensing while ignoring the interests of the consumer in a space where consumer protection is paramount.

Unless the Bill shifts focus by clearly narrowing down its scope, it fails to create a holistic regulatory framework that provides for straightforward processes and is anchored on consumer interests. This could have a negative impact on access to credit for a majority of Kenyans who are already underserved.

The future of digital credit in Kenya is dependent on a review of the Proposed amendments accompanied by consumer centric regulations focused largely on data privacy and regulated interest rates.

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