Digital lenders must be licensed not just registered - CBK

Pay day lenders accounts for Sh50.6 billion loans, a paltry 1.6 percent of the banking sector loan book.

In Summary
  • Digital mobile lenders will have six months to be licensed if the bill is passed.
  • The lobby group said while they support the proposed law, likening them to deposit-taking entities will be unfair. 
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.

The Central Bank of Kenya maintains that digital lenders must be licensed just like other financial institutions for effective regulation.

Presenting its position on the Central Bank of Kenya (Amendment) Bill, 2021 yesterday, the regulator said licensing of digital lenders will grant it an oversight role, leading to a robust credit market and  consumer protection.

"The proposed law should provide CBK with general supervisory powers for effective regulation. It should also permit digital providers to carry accidental business,'' Njoroge yesterday told the National Assembly Committee on Finance and National Planning. 

CBK's position is in contrast with the Digital Lenders Association of Kenya  (DLAK) that wants the proposed law to limit them to registration rather than licensing, saying this will prove costly for them. 

''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,'' DLAK said.

The lobby group said while it supports the proposed law, treating them like deposit-taking entities will be unfair. 

''We do not take deposits from the public and lend off our own investments, profits, and capital, and as such, we do not pose a prudential risk and thus, capital adequacy requirements or prudential regulations are not a reasonable framework,'' DLAK said.

The association said that consumer protection type of regulations that concentrate on lending and debt collection practices would be most ideal to the sector as digital lenders do not pose a systemic risk to the market given that they do not take deposits like banks or Saccos.

If passed into law, the Bill gives digital mobile lenders six months to be licensed by the CBK.

The banking regulator will be expected to determine minimum liquidity and capital adequacy requirements for digital credit providers akin to conditions set for operating a bank in Kenya.

The digital lenders will play under the same rules as commercial banks, including having to seek the CBK’s nod for new products and pricing that includes loans charges and putting a ceiling on non-performing loans at not more than twice the defaulted amount.

The regulator will have to vet the management of digital loan providers, signaling a requirement to have a local office

The main aim of the government-led law is to curb the steep digital lending rates that have plunged many borrowers into a debt trap as well as predatory lending.

Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualized, leading to mounting defaults and an ever ballooning number of defaulters.

For instance,  M-Shwari, Kenya’s first mobile-based savings and loans product introduced by Safaricom and NCBA in 2012, charges a facilitation fee of 7.5 percent on credit regardless of its duration, pushing its annualised loan rate to 395 percent.

Tala and Branch, the other top players in the mobile digital lending market, offer annualised interest rates of 152.4 percent and 132 percent respectively.

Others like ipesa, Okash, Opesa among others charge at least 500 percent. 

It also seeks to push out rogue players amid concerns of unethical practices such as money laundering, illegal mining of customer private data, and shaming of borrowers who default on repayment.

Analysts reckon that a majority of the fintech will struggle to meet the tough licensing conditions.

Tens of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans.

Even so, CBK insists that digital lenders control a tiny profile of sector activities, accounting for only Sh50.6 billion loans, a paltry 1.6 percent of the banking sector loan book. 

According to the regulator, this accounts for only 80 percent of the smallest bank in the country. 

It further told the Parliamentary Finance Committee that the country has a total of 3.9 percent of mobile loan accounts. 

In April, the CBK barred unregulated digital mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs).

Last year, the regulator barred all unregulated digital and credit-only lenders from submitting names of loan defaulters to credit reference bureaus (CRBs) for blacklisting, dealing a major blow to their debt recovery measures.