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.