ENSafrica (Kenya): Digital lending and providing now regulated in Kenya

By Belinda Ongong’a | ENSafrica | Kenya | Associate. Reviewed by Mahesh Acharya, Partner, ENSafrica.

On 18 March 2022, the Central Bank of Kenya (“CBK”) published regulations giving itself power to regulate and provide oversight to digital lenders. This is on the backdrop that digital lenders/providers have been operating unregulated within the Kenyan market.

The Digital Credit Providers Regulations, 2022 operationalise the provisions of the Central Bank of Kenya (Amendment) Act, 2021, which was assented to on 7 December 2021 and became effective on 23 December 2021. The Act required that the Regulations must be made within three months of the Act coming into force and therefore they became operational immediately.

Licensing of digital credit providers

Under the Regulations, a person can only engage in digital credit business if they are:

• licensed by the CBK; or
• permitted to do so under any other written law.

Consequently, all the unregulated digital credit providers (“DCPs”) are required to apply to the CBK for a license within six months of the publication of these Regulations, that is, 17 September 2022. Failure to comply by this date means that a DCP will be required to cease operations in Kenya.

Some of the key terms and definitions relating to digital credit providers are:

• Digital channels – include the internet, mobile applications, computer devices or any system as may be prescribed by the CBK.
• Digital credit – any credit facility or arrangement where money is lent or borrowed through a digital channel.
• Digital credit business – includes any business of providing credit facilities or loan services through digital channels.
• DCP – means any person licensed by the CBK to carry on digital credit business.

The Regulations provide that a licence is to be granted within 60 days of submission of a complete application. The requirements in terms of documentation are set out in the Regulations and are accessible on the CBK  website . Once a licence is granted, the it cannot be transferred, assigned or encumbered in any way.

Exempted institutions and entities

Under the Regulations, the following institutions and entities are exempt from registration:

• an institution licensed under the Banking Act;
• an institution licensed under the Microfinance Act, 2006;
• a Sacco Society licensed under the Sacco Societies Act;
• the Kenya Post Office Savings Bank;
• credit 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 whose primary business is the provision of the goods or services;
• an entity whose digital credit business is regulated under any other written law; or
• any other entity approved by the bank.

Compliance with the Regulations

The compliance requirements under the Regulations include:

• compliance with the traditional fit and proper tests applicable to significant shareholders, directors, CEOs and senior officers;
• disclosure of information to credit reference bureaus for purposes of discharging functions of the digital lenders and licensed credit reference bureaus;
• ensuring there are adequate consumer protection provisions;
• adoption of elaborate anti-money laundering measures;
• adoption of measures to counter financial terrorism;
• compliance with financial and other reporting requirements; and
• compliance with data protection regulations.

Penalty for operating without a licence

The Regulations outline the various offences, penalties and other measures necessary for the regulation of digital lending and ensuring compliance.

In particular, engaging in digital credit business without a licence constitutes an offence under the Act and the Regulations. Under the Act, a person operating without a licence is liable on conviction to imprisonment for a term not exceeding three years or to a fine not exceeding KES5-million (approx. USD 43, 698 at the time of writing) or to both.

We recommend that all firms, companies and or entities engaging in digital credit business initiate steps to comply with the Regulations. Contact us for assistance and advice on ensuring compliance with the Regulations.

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. For any further information or clarifications on the above matters, please contact: Mahesh Acharya, Partner, ENSafrica.