The parliamentary committee on Finance and National Planning has made amendments to the proposed Central Bank of Kenya (Amendment) Bill, 2021, which seeks to regulate the burgeoning digital lending space in Kenya.
Initially, we had noted that the bill was ambiguous, but the new amendments may resolve some of these issues. The key changes to the bill include:
The Central Bank of Kenya (CBK) has been made the supervisory authority on lending rates. Initially, the bill made no mention of lending rates. The parliamentary committee noted that the current interest rates were predatory and has hence given the regulator oversight into setting interest rates. Although the interest rates will not be capped, the central bank will have a say on what will be considered fair pricing for digital lenders and will also approve pricing models.
Capital adequacy and liquidity requirements have been removed. Previously, the bill required the regulator to impose minimum capital and liquidity requirements for digital lenders. This was rejected by the parliamentary committee on the grounds that the lenders do not take deposits from the public in order to lend. This is positive for digital lenders as regulations on capital would have limited the number of players that were able to participate in the digital lending market.
The licencing period has been set at six months after the bill is passed into law. Digital lenders will have a period of six months to seek licencing and approval from the regulator.
Digital lenders are now required to report defaulters. Back in April 2020, digital lenders were asked to stop filing reports on borrowers with the Credit Reference Bureaus (CRB) as they were reporting even the smallest of infractions, which were in most cases unnecessary, and overloading the system. However, halting these reports meant an increase in risk for banks as borrowers who had actually defaulted on several digital credit loans could borrow from the banks' regulated digital lending channels, with no way for the bank to track this information. The revised bill now requires digital lending firms to offer information – both positive and negative – on its borrowers.
According to FinAccess, accessing unregulated digital credit has grown from 0.6% of Kenya's adult population in 2016 to 8.3% in 2019, which has led the government to introduce legislation to regulate the sector. The reasons for the new regulations over the sector, which now encompasses over 30 digital credit operators, according to the Central Bank of Kenya, are as follows:
Lack of information on defaulters. Digital credit lenders were previously not obliged to share information with the CBK on loan defaults – therefore, borrowers who have defaulted on several digital credit platforms could easily go undetected. When these borrowers try to borrow from bank-run digital platforms, their credit history is not available to be examined.
Lack of consumer protection. Unlike banks, digital lenders are not mandated by law to provide customers with full terms and conditions before onboarding them. As such, customers are exposed to predatory pricing, aggressive collection strategies and unfair data usage by the lenders.
Money laundering risk. Since digital lending platforms are unregulated, they have been deemed as easy avenues for money laundering.
Digital lenders did not often engage with customers when they were being reported to the credit reference bureaus, which has been used to report borrowers for even the tiniest of infractions.
Regulations in digital lending are overall positive for banks
The digital lending segment has grown exponentially in Kenya due to the lack of regulations, which has allowed all kinds of products to flourish. According to the Digital Lenders Association of Kenya, lenders were issuing cKES4bn per month to borrowers prior to March 2020. Although, over Covid, this has declined somewhat, to cKES2bn per month now.
So far, digital lenders are more popular with customers versus banks as they are more accessible and easy to set up. With both capital and liquidity requirements now removed from the proposed legislation, digital lenders will be more agile than banks and hence remain the preferred option for borrowing. Still, we do not view this as negative for banks as the sector will continue to record strong growth in digital lending given their large market share in the retail space.
The regulation on information sharing, meanwhile, is positive for banks as it provides access to information on defaulters and allows banks to more accurately score their customers. Additionally, at present, the true number and nature of digital lenders in the market is currently unknown, hence there is little clarity on the competitive landscape in the country. The updated regulation on licencing will allow for more transparency in the market and banks will be able to have a clear view of their competitors who will now be operating within some set regulations.
The timeline for the bill to become law is still unclear
Now that the bill has gone through the parliamentary committee on Finance and National Planning, the next stage will be tabling the bill in the parliament for discussion. The bill must go through three readings in parliament before receiving presidential assent to become law. There is no particular deadline by which the three readings must be completed and, therefore, it is difficult to know what the likely timeline will be.
Moreover, the bill could well be amended in this process – ie the current draft is by no means final. That said, we expect the bill to become law in some form, given the momentum behind the push to regulate digital credit, with the CBK especially supportive.