Overview of the Central Bank of Kenya (Digital Credit Providers) Draft Regulations, 2021
The Central Bank of Kenya (Amendment) Act, 2021 (the Amendment Act) was enacted on 23rd December 2021 to amend the Central Bank of Kenya Act (Cap 491) (the Principal Act) to empower the Central Bank of Kenya (CBK) to regulate, license and have oversight over digital credit providers. The Amendment Act amends section 4A of the Principal Act to allow the CBK to license and supervise digital credit providers, who were previously not regulated under any other written law. Through this, the amendment of section 57 of the Principal Act mandated the CBK to draft the Central Bank of Kenya (Digital Credit Providers) Regulations, 2021 (the Regulations) to provide further guidance on matters involving licensing, registration, oversight and otherwise regulation of digital credit providers.
Overview of the draft Regulations
The Regulations are not intended to apply to deposit-taking institutions such as banks, microfinance institutions and credit unions and as such, they don’t allow digital credit providers (also, Digital Lenders) to invite or collect deposits in the course of carrying out their digital credit business. The Regulations are purely intended for persons operating digital lending services through an online platform and does not extend to persons offering lending services through other means.
The Digital Lenders are required to apply for licensing from the CBK in the prescribed form prior to undertaking any digital credit business and where the Digital Lender is already in operation at the time the final version of the Regulations are published, they will be required to obtain the requisite license within six (6) months from the date of publication. It is noteworthy that an applicant for a license is required to be incorporated as a company in Kenya with at least one (1) registered physical office.
The Regulations require that an application for licensing be accompanied with various documents, including but not limited to:
- copies of the company’s incorporation documents;
- details of the ICT system to be used in its operations;
- description of delivery channels or platforms to be used by the Digital Lender;
- the terms and conditions of the services offered;
- a copy of the agreement with a telecommunication or other service provider for provision of channel or platform to facilitate the digital credit business;
- anti-money laundering and data protection policies in place;
- a description and evidence of source of funds; and
- a receipt of payment of application fee (which is Ksh. 5,000 for the first application and thereafter Ksh.20,000 to be paid annually), as well as the details of the shareholders.
2. Approval of directors and significant shareholders
In addition to providing the information above, the Regulations also require the CBK to approve the significant shareholders of the company, as well as the directors and any other key officers of the company such as the CEO. This ultimately means that the approval of the CBK will also be required to approve any change in the shareholding structure, particularly where there are new shareholders coming in. This will be done through the fit and proper criteria of the CBK where the party completes the requisite form for assessment. The CBK may further request any person to furnish such additional information as may be necessary in determining the professional or moral suitability of the directors and shareholders.
The Regulations go on to provide that the CBK may also direct a significant shareholder whom it deems as not fulfilling the fit and proper criteria to dispose of all his shares in a Digital lender within such period as it may direct, and or prohibit a director or chief executive officer from holding any office in a Digital Lender if determined not to meet the fit and proper criteria, or for any other good cause shown.
3. Timeline for processing an application for licensing
Where the CBK is satisfied with the information submitted with the application, it shall the issue a license within sixty (60) days of receiving a complete application. The CBK shall thereafter publish the name of the applicant in the Kenya Gazette and on its website within thirty (30) days of granting the license. Once granted, the license remains valid unless suspended or revoked by the CBK in accordance with the Regulations. A licensee will thereafter be required to pay an annual fee to the CBK as set out in the Regulations, which annual fee is currently prescribed to be Kenya Shillings twenty thousand (KShs. 20,000).
4. Approval for the transfer of assets and liabilities
The Regulations provides that the approval of the CBK is required before a Digital Lender enters an amalgamation or an arrangement to transfer all or any part of its assets and liabilities to another entity. Effectively, this means that CBK approval is required for any transfer of shares by a Digital Lender.
5. Reporting to the credit reference bureau
Under the proposed Regulations, a Digital Lender will be required to disclose any positive or negative information of its customers to the licensed credit reference bureaus, where such information is reasonably required for the discharge of its functions and that of the licensed credit reference bureau. However, Digital Lenders are not allowed to disclose any negative credit information of a customer where the amount does not exceed Kenya Shillings one thousand (KShs. 1,000). Furthermore, a Digital Lender is required to obtain the customer’s consent through oral, print, or electronic means before sharing such credit information with a credit reference bureau.
6. Other Obligations of Digital Lender
The proposed Regulations also mandate a Digital Lender to take reasonable steps to satisfy itself on the customer’s ability to repay the credit and set borrower limits in its credit policy, which limits shall comply with any additional borrower-limits or requirements that may be prescribed by the CBK.
The Regulations further provides for a maximum amount to be recovered against a non-performing loan, being the sum of the principal owing when the loan becomes non-performing, the interest as agreed but that shall not exceed the principal owing when the loan becomes non-performing, and any expenses incurred in the recovery of any amounts owed by the customer.
A Digital Lender and/or its officers is further prohibited from partaking in unconscionable conduct in its operations, such as the use of threat or violence or profane language, making of unauthorized or unsolicited calls or messages to a customer’s contacts, making improper or unconscionable debt collection tactics, or any other conduct whose consequence is to harass, oppress, or abuse any person in the course of debt collection.
In addition to the CBK’s on-site and off-site monitoring, Digital Lenders are also supposed to generate, and issue receipts or an acknowledgement of transactions carried out by or with a customer and make its books and records readily available to the CBK on request for inspection and other supervisory purposes.
7. Consumer Protection
Due to the growing need to protect the consumers from some unscrupulous practices and conduct by Digital Lenders who take advantage of the unregulated space, the Regulations prescribes some consumer protection mechanisms relating to digital credit business, to provide additional protection above the that provided for under the Consumer Protection Act, No.46 of 2012. To start with, Digital Lenders will be required to prepare and maintain key information in a summarized form that informs the consumer of the fundamental benefits, risks and terms of the product or service, in a clear and transparent manner. In addition, they will also be required to establish a complaints redress mechanism, including a channel for communicating customer complaints, and ensure that the customers are well aware of such mechanisms in place.
With respect to customer complaints, the Regulations requires each to be addressed within thirty (30) days of its reporting to the Digital Lender. Furthermore, all records of all complaints lodged, and the outcome of their resolution made available to the CBK on request.
In conclusion, the proposed Regulations provides extensive guidelines to the CBK’s supervisory and advisory role over the digital credit businesses so as to protect the interests of both the members of the public accessing the digital credit services as well as of the Digital Lender. The Regulations give the CBK the mandate to give advice and make recommendations to Digital Lenders with regard to the conduct of its business generally, issue directions regarding measures to be taken to improve the management or business methods, as well as ensure compliance.
As the proposed Regulations are still in draft form and are yet to be effected, it is likely that some of the above aspect may vary from the final version to be published. It is therefore worthwhile to keep an eye out for the final version of the Regulations before making changes to any of your systems and procedures.