Statement On Proposed Changes In The Central Bank of Kenya (Amendment) Bill, 2021

The Digital Lenders Association of Kenya (DLAK)  welcomes the recent regulation as drafted by the parliamentary finance and planning committee which proposes to have digital lenders under the regulatory ambit of the Central Bank of Kenya.

“DLAK has always been in favor of regulation that is forward-leaning and that balances the need for consumer protection with the importance of permitting the availability and further development of innovative digital financial services.

This is why we offered concrete regulatory proposals to advance discussions at the onset of the regulatory conversation and have crafted a detailed and strict code of conduct for participating members”. Said Mr. Kevin Mutiso, Chairman, Digital Lenders Association of Kenya.

We would like to call for a collaborative, open, and thoughtful discussion process on particular areas as follows;

We propose to add provisions concerning the non-applicability to digital lenders of other provisions of the Central Bank of Kenya Bill (“Bill”) than those indicated in the Regulations. This is because digital lenders use their own capital (non-deposit-taking institutions) and have a limited scope of activities i.e. are solely focused on granting small loans. Therefore applying the same rules to Digital Lenders as for banks is asymmetrical and would create an enormous regulatory and compliance burden for Digital Lenders that they cannot realistically bear. They are small and lean organizations that do not have the luxury of creating big and costly compliance and legal departments (as is the case for Banks).

Regulation should focus on the registration process instead of a license.

We would like to suggest that regulation should focus on the registration process instead of licensing. This is a common practice for the Digital Lenders regulations implemented in significant jurisdictions in the EU like Spain and Poland, we can also find such regulation in Australia.

The above is supported by the conclusions of the recent comparative study on the regulation of digital lending prepared by PwC. The presented reports show that the licensing in relation to Digital Lenders is too heavy for this type of activity.

Typically Digital Lenders are small companies with a maximum of 30 employees. Thus, the best solution is to use a regulatory system that will fulfill its task and make the legislator feel comfortable with the applied solution, but at the same time will not cause a significant increase in the operating costs of a company, nor will it be a complicated and highly formalized process.

Additionally, the legislator has used in the said Regulation the term “registration” in section 57 (3) (a) and 59 (2).

We propose that the register should be managed by the CBK. Digital Lenders shall be obliged to update the data contained in the register. In the event of any changes to the data disclosed in the register digital lender must notify the CBK immediately. The changes should be reflected in the register.

The registration shall be done only if the Digital Lender will fulfill the requirements indicated in the Regulation. The registration should be granted indefinitely.

The Digital Lender can be removed by the CBK from the register only if:

The requirements to obtain the registration are not met, or

At the digital lender’s request.

Consumer protection

As Digital Lenders completely absorb 100% of the risk in lending to their customers and do not rely on deposits as collateral, they employ the principle of risk-based pricing where different interest rates are provided to different consumers based on their creditworthiness.

Risk-based pricing looks at factors associated with the ability of the customer to pay back the loan and their borrowing habits.

 We propose that all customers shall be provided with clear, transparent, and articulated information on the pricing of the loans before they apply for the loan by providing the conclusion of the loan agreement in the unified form with the key financial information concerning the loan. This solution is implemented in all EU countries, but also we can find it in Uganda.

Additionally, in order to increase consumer protection, we propose to establish a position of a financial ombudsman within the CBK structures, responsible for examining customer complaints.

Non-prudential type of regulations and no capital adequacy requirements  

Digital Lenders do not take deposits from the public and lend off their own investments, profits, and capital, and as such, they do not pose a prudential risk and thus, capital adequacy requirements or prudential regulations are not a reasonable framework for the industry.

Consumer Protection type of regulations that concentrate on lending and debt collection practices would be most ideal to the sector as digital lenders do not pose a systemic risk to the market given that they do not take deposits like banks or SACCOs.

Anti-money laundering and measures for counting financing terrorism and data protection

The current regulation concerning anti-money laundering and measures for counting financing terrorism covers Digital Lenders as well. Thus it is not necessary to issue a specific regulation on that matter. In addition, it steps the CBK into the competencies of the Financial Reporting Center.

The same concerns personal data the Personal Data Protection Act is already issued and applies to all entities providing services in the territory of Kenya, regardless of the subject of their activity. Thus, there is no need to graduate the requirements in this respect for various categories of entities that process the data.

A different approach would result in a large fragmentation of the current regulation, and thus the need for the responsible authority to build a multitude of processes. In addition, it also steps the CBK into the competencies of the authority responsible for the protection of personal data.

Credit information sharing

At the onset of COVID-19, the CBK locked out all Digital Lenders from the credit reporting ecosystem.

We propose to add direct regulation that the Digital Credit Providers will be entitled to receive the reports from CRBs and to submit the reports with credit information to CRBs as well.

It is justified to restore Digital Lenders’ access to submit credit information reports on the terms applicable to other market players as the principal object of this Regulation is to regulate the digital lenders’ industry.

Transitional Provisions

The new Regulations contain transitional provisions, however, in order to maintain business continuity and uninterrupted business the proposed regulation on Section 59 shall be modified.

Subsection (1) of this section concerns the requirement to prepare the new detailed regulation necessary under the amendment. This new regulation shall be presented within 3 months of the entry into force of the act. It states the first step of the transitional provisions. On the other hand, the current digital lenders, who were carrying out the business at the time of the entry into force of the Regulation, should register within 6 months of coming into force of this new Regulation.

We propose that these terms are modified and the period of 6 months be extended to 9 months and counted from the date of issuing the detailed regulation referred to in section 59 (1). It is justified in particular by the fact that the existing lenders have to adapt their activity to the new requirements.

Currently, the presented provision of Section 59 creates an automatism, according to which, when 6 months referred to in section 59 (2), has elapsed, then automatically all digital lenders will not be able to conduct their current activity. This, in turn, creates an enormous amount of uncertainty on the digital lenders’ market and will significantly affect their business.

Section 59 in the current wording presents also a mechanism according to which Digital Lenders will not know what requirements they will have to meet in order to obtain registration until the regulation referred to in subsection (1) is issued. Thus it has a huge impact on further operations of Digital Lenders and the period they will have to adjust their activities from the moment of issuing the additional Regulation.

Moreover, we can imagine that this new regulation may appear after 3 months from the entry into force of this regulation, which in fact will give Digital Lenders only the next 3 months to adapt to the new requirements. The above shows that in reality, the current digital lender will not have 6 months to prepare their business for changes, but this time can be reduced even to 3 months.

On the other hand in the presented situation, CBK will have less than 3 months to review all the documents of all the current digital lenders and issue the registration. As result, it can provide to the destabilization of the CBK’s daily responsibilities.

It is however very important to change section 59 (2) and specify that the period of 9 months shall count from the date of issuing the regulation indicated in section 59 (1).

Delegated Authority to DLAK as an SRO (Self-Regulatory Authority)

DLAK as an industry association has made great strides in fostering unity and collaboration amongst the digital lenders and has published a Code of Conduct which DLAK members are required to comply with.

DLAK as an SRO would set and enforce rules and standards relating to the conduct of digital lenders in the industry set by the CBK and will govern and monitor compliance to the Regulations or law under CBK purview and thus report non-compliance and violations to the CBK for punitive action.

In its SRO capacity, DLAK will serve as a two-way communication channel between its members and CBK, easing the pressure on regulatory resources which would be better placed to address larger economic and systemic challenges in the financial industry services industry in Kenya.

It is important in an evolving and maturing economic ecosystem like Kenya, to ensure and safeguard the optimal use of regulatory resources through DLAK’s development of industry standards in respect of pricing practices, customer protection measures, and grievance redressal mechanisms with guidelines provided by the CBK and sanctions where these industry standards do not work.

Lastly, based on our published research, it is clear that the overwhelming majority of Kenyan citizens who have secured credit from digital lenders are supportive of such models, and all stakeholders in Kenya should ensure that final regulatory frameworks have the consumers’ best interest at the center.

We look forward to engaging with all involved stakeholders to drive positive outcomes.