The Rise Of Non-deposit-taking Credit Providers In Kenya: How The 2024 Business Laws Amendment Act Is Changing The Credit Game

Kenya’s credit landscape has seen a dramatic transformation over the last few years. With the rise of mobile phones and digital platforms, credit has become more accessible than ever before. Apps offering quick loans and peer-to-peer platforms have thrived. As from 2022 however, this landscape started changing. The Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 and more recently the Business Laws (Amendment) Act, 2024 started reshaping the way credit providers operate. In this article, we analyze how, you - as a recipient of the services or as a provider of the credit services, are impacted by the recent changes in law.

The Digital Lending Boom: A Quick History

Credit is a key element of business and is seen as one of the major ways through which one can access financing for both individuals and business. Credit is sourced from various sectors including the institutional players such as banks, saccos and micro-finance institutions. The evolution of advancing credit in Kenya has seen the entry of the non-deposit taking credit providers. This space was largely unregulated and grew rapidly due to the huge demand for more accessible and informal channels of lending.

Shortly thereafter, the digital lenders came in and completely changed the landscape. Kenya has long been a leader in digital finance, with mobile money services like M-Pesa setting the stage for digital credit offerings. In the early 2010s, the rise of mobile lending apps was explosive. Companies like Tala, Branch, and M-Shwari revolutionized the credit market by making it easier for low-income earners or un-banked Kenyans to access small loans using just their mobile phones without going through the rigorous vetting that characterizes bank loans. These apps were hailed for their convenience, with loan approval times as short as 15 minutes and no paperwork involved.

However, this rapid growth of digital lending also brought with it concerns such as; exorbitantly high interest rates, exploitative practices, lack of a sustainable credit ecosystem and lack of consumer protection. To regulate this new and expanding market, the Central Bank of Kenya (CBK) introduced a set of guidelines, aiming to bring some structure to the booming sector. This started with the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022. These Regulations required amongst other things, that a Digital Credit Provider (DCP) to:

· Have a consumer protection policy which details the consumers’ rights and the complaints redress mechanisms;

· Have a data protection policy which must provide that consent of the subject must be obtained be processing the subject’s data- including submitting the customer’s details to a credit reference bureau;

· Have an Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Policy to ensure compliance of the relevant laws and ensuring that a DCP is not used to finance or otherwise support fraudulent activities, money laundering or terrorism.

The perception created from the title of the regulations seemed to imply that the regulations only applied to ‘digital’ lenders and that non deposit taking credit providers could continue operating without the DCP License. This thinking however contradicted with the wording of the regulations and the licensor’s application of the same. The regulations provided that a digital credit business was to mean “the business of providing credit facilities or loan services through a digital channel.” The definition of a ‘digital channel’ was quite wide and included the “internet, mobile devices, computer devices, applications and any other digital systems as may be prescribed from time to time”. This wide definition therefore seemed to include all credit providers so long as they were using any digital channel in any part of their business - thus creating some confusion on the application of the law and who was required to obtain the license.

Enter the 2024 Amendment Regulation of Non-Deposit Taking Credit Providers

The Business Laws Amendment Act of 2024 marks a pivotal moment in the evolution of Kenya’s credit market, ushering in sweeping changes that will redefine how credit is categorized and regulated across the country. The most notable shift is the complete removal of the term “digital lenders” from the Central Bank Act.

With the amendment to Section 2 of the Central Bank of Kenya Act, the previous definitions of “digital channel,” “digital credit,” “digital credit business,” and “digital credit provider” are now eliminated. These terms, which once set digital lenders apart from traditional credit providers, have been replaced by broader, more inclusive definitions that broaden the scope to include all credit providers. The new scope has not only included the non-digital players, but has also extended to other non-traditional forms of advancing credit such as the “buy now, pay later” arrangements. ‘Buy now, pay later’ business model refers to credit arrangements where consumers can purchase goods and pay in installments, with or without interest.

In a landmark move, the amendment introduces a unified category of “non-deposit-taking credit providers,” which includes not only digital lenders but also asset financiers, peer-to-peer lenders, and businesses offering buy-now-pay-later services. This shift consolidates all entities that provide credit without accepting deposits under one comprehensive regulatory umbrella, meaning whether you're securing a loan via an app, or through traditional channels such as cheques or cash; or purchasing an asset through the lipa pole model, you are now subject to the same regulatory oversight and protections.

What’s Changing? A Closer Look at the Amendments

The amendments bring more serious oversight to the sector. Here’s a breakdown of the key changes:

1. Stricter Penalties for Non-Compliance (Section 55 of the Banking Act) 

Non-deposit-taking credit providers can now face severe penalties for not adhering to regulations. Fines of up to KSh. 20 million or three times the financial gain from non-compliance are possible for businesses, while individuals could be fined up to KSh. 1 million. The new penalties ensure that financial providers cannot skirt the law.

2. No More "Digital Lender" Distinction (Section 2 of the Central Bank of Kenya Act) 

The phrase “digital credit” has been removed, and all non-deposit-taking credit providers are now regulated under the same umbrella. Whether you're getting a loan from an app or securing financing from a traditional lender, the regulatory framework is now consistent.

3. Stricter Licensing and Supervision (Section 33R)

The Central Bank of Kenya now has more power to regulate and supervise non-deposit-taking credit providers. This includes setting pricing guidelines, approving business channels, and ensuring ethical practices across the industry. A new Code of Conduct will hold these providers accountable, ensuring consumers aren’t hit with hidden fees or deceptive interest rates. Additionally, vetting of directors, shareholders, and key personnel is now required to ensure the integrity and suitability of those in control of these businesses.

4. Enhanced Consumer Protection (Section 33S) 

Perhaps the most important change for consumers is the increased focus on consumer protection. Non-deposit-taking credit providers must adhere to clear terms and conditions, and any unfair practices could lead to significant penalties. Consumers now have a clearer

path to resolve complaints, and providers must follow the Central Bank's directives promptly.

Conclusion

The case of George Lalla Oduor v. Cannon Assurance (K) Ltd [2019] eKLR serves as a critical reminder of the importance of complying with licensing requirements under the Banking Act. The court ruled that the failure of the respondent to obtain the necessary license before engaging in a mortgage transaction rendered the agreement unenforceable. This decision highlights the significant risks businesses face when they neglect legal obligations, particularly in securing loans and realizing collateral. Without proper licensing, creditors may find themselves unable to enforce their rights or recover outstanding debts through collateral, which can lead to costly legal battles and financial losses.

At CM Advocates LLP, we are committed to helping your business stay compliant with the ever-evolving legal landscape. Our expert legal team offers comprehensive advice and support to ensure your business meets all regulatory requirements, including obtaining the necessary licenses from regulatory bodies like the Central Bank of Kenya (CBK). We assist with formulating policies, procuring registrations, and liaising with relevant authorities to ensure that your business operates within the bounds of the law. We also keep you updated on the latest changes in regulations, helping you avoid the risks and penalties associated with non-compliance.

Let us be your trusted partner in navigating the complexities of business regulation. Visit us today or explore our services online at www.CMAdvocates.com. For any clarifications regarding the foregoing or any of our other offering please contact the contributors through the emails below or the team through commercial@cmadvocates.com

Contributors: Brian Thuranira & Victorine Rotich