The recently released Central Bank of Kenya Bill (Amendment) of 2021 (the “Bill”) is the latest attempt by parliament to regulate previously unregulated digital lenders.
In 2020, there were two different attempts to amend the law to give the Central Bank of Kenya (CBK) power to regulate digital lenders. The bill defines “digital credit” as a credit mechanism or arrangement in which money is lent or borrowed through a digital channel, that is, the Internet, mobile devices, computing devices, applications and any other digital system. that CBK can prescribe.
If the bill becomes law, all digital lenders will be under the control and regulation of the CBK. New digital credit providers must be registered and authorized by the CBK before conducting any business.
Similarly, any person who, prior to the entry into force of the proposed law, has been in the business of providing credit facilities or loan services through a digital channel and not regulated by any other law must register with CBK within of the six months after his coming. in force of the bill.
The bill requires the CBK to establish regulations to regulate digital loans within three (3) months from the date of its approval.
Regulations are required, among others, to establish registration requirements for digital credit companies, management requirements for digital credit providers, the fight against money laundering and measures to counter terrorist financing, credit information sharing, data protection, consumer protection and reporting requirements. for digital credit providers.
Regulation has its own advantages and disadvantages. On the one hand, regulation can promote openness in product markets, thus providing the necessary conditions for research and innovation.
On the downside, regulation can hamper the development of new and improved products and create barriers to innovation by increasing uncertainty and costs.
In fact, the success of mobile money in Kenya can be attributed in part to the lack of regulation in the sector that gave innovators room to innovate without the risk of conflict with the regulator. For example, at the time of M-Pesa’s launch in Kenya, the CBK found that it had no clear authority over non-bank fund transfers. Thanks to this regulatory gap, CBK decided that it would not interfere and consequently issued a letter of no objection to the launch of M-Pesa.
It is likely that in an attempt to protect consumers, CBK regulations seek to regulate the interest rates that digital credit providers will charge. Regulating interest and principal requirements can affect the digital lending space with adverse consequences for the very consumers the bill seeks to protect.
It is worth noting that digital credit providers are serving a specific segment of the market that has long been excluded from the credit market. While banks and other traditional financial service providers currently offer mobile and Internet banking services, these services are intended to serve the “banked” segment of the population.
Furthermore, it is highly unlikely that a bank, microfinance institution or credit union (Sacco) will grant credit to a client without any collateral. Banks will generally require collateral in the form of a title deed, motor vehicle log book, or at least a payment receipt accompanied by life insurance coverage.
Saccos, which are believed to have the lowest security requirement, will only credit a member against the member’s savings or a guarantee from another member. Many Kenyans cannot meet the security requirements to access credit from these institutions. On the contrary, digital lenders are willing to give their clients credit without any collateral.
Due to the structure of their lending models, digital lenders are exposed to a high risk of default compared to banks, microfinance and Saccos. This justifies, at least in part, the need for them to charge high interest rates to protect themselves against the high risk of default on the part of their clients.
Studies have shown that the introduction of an interest cap excludes SMEs from the bank credit market, as they are considered high risk. Without a limit, lenders are free to price each loan based on the risk involved, on a case-by-case basis.
This explains why the introduction of the interest cap by the CBK in 2016 in the hope that SMEs would have better access to credit did not achieve the desired result and the interest cap had to be raised. Any attempt to regulate the interest charged by digital lenders would likely limit access to credit by the segment of the market they currently serve.
While it is important to protect consumers from unscrupulous digital lenders, a balance needs to be struck between protecting consumers and ensuring that they continue to enjoy the services offered by digital lenders.
The Consumer Protection Act establishes the Kenya Consumer Protection Advisory Committee. The committee’s role includes promoting or participating in consumer education programs, advising consumers on their rights and responsibilities under appropriate laws, and making general information that affects consumer interests available to consumers.
Given the delicate balance that must be struck to protect consumers while ensuring that they continue to enjoy credit services from digital lenders, it would be appropriate for the government to capitalize on consumer education to empower consumers with information, which It allows them to make the right decisions about whether or not to accept credit from digital lenders.
The government can also protect consumers without stifling the growth of digital loans by working collaboratively with stakeholders.
Josphat Kaibiru is Associate in the Real Estate and Finance practice at DLA Piper Africa, IKM Advocates