The amendments to the Central Bank of Kenya Act (Chapter 491 of the Laws of Kenya) (the “Act”) to give the Central Bank of Kenya (“CBK”) powers to regulate the digital lending business came into effect on 23rd December 2021. At the same time, the CBK published draft Central Bank of Kenya (Digital Credit Providers) Regulations (“Regulations”) prescribing the procedure and considerations to be applied by the CBK in licensing and regulating the activities of digital lenders.
The Act requires CBK to publish the enabling Regulations within 3 months from the coming into force of the amendments which sets the deadline for approval and publication of the Regulations to be around 23rd March 2022. The Regulations are therefore imminent and all digital lenders not already regulated under any other law, must prepare for the licensing process.
For a start, it is important to determine whether the lending business operated fits within the scope of application of the licensing regime.
The Act as amended, use the term digital credit business which it defines to mean ‘the business of providing credit facilities or loan services through a digital channel’. Digital channel has been defined to mean, ‘the internet, mobile devices, computer devices, applications and any other digital systems as maybe prescribed by the CBK’.
Based on this definition, whether a lender is subject to licensing under the Act depends on the mode of delivery of his credit facilities. If the mode of delivery is through a digital channel whether the internet, webapps, mobile apps, mobile devices which would include use of USSD, computer devices or any other digital system prescribed by the CBK, the lender is now mandated to obtain the digital credit provider license; unless it is regulated by another law. The traditional shylock to whom one would take movable items and receive cash in hand at whatever interest rate, is not required to obtain a license. Operating without a license now attracts a penalty of a fine of KES 500,000 or imprisonment for a term of 2 years, or both.
As noted above, if the digital lender is regulated by another law, they would not need to seek the digital credit providers licence. The Regulations specify that they do not apply to:
- an institutions licensed under the Banking Act;
- an institution licensed under the Microfinance Act;
- a sacco society licensed under the Sacco Societies Act;
- Kenya Post Office Savings Bank supervised under the Kenya Post Office Savings Bank Act;
- Credit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provisions of services by a person (this excludes ordinary traders who let their customers take goods or services on credit); and
- any other entity approved by the CBK
Notably, a license to carrying on the digital credit business does not permit the licensee to invitate or collect deposits from the public. This is within the purview of the banking laws.
In respect of the transition provisions, existing digital credit providers are required to apply to the CBK for a digital credit provider license within 6 months of publication of the Regulations.
Should you have any queries on the licensing requirements for digital lenders, please contact Felicia Solomon at felicia@mmsadvocates.co.ke or Allan Mzungu at mwamuye@mmsadvocates.co.ke