The bill was informed by widespread complaints on the unregulated nature of many mobile loan services and the documented exploitative practices of some of the companies
The bill was informed by widespread complaints on the unregulated nature of many mobile loan services and the documented exploitative practices of some of the companies.

The National Assembly Finance and Planning Committee has approved the state-backed Central Bank Amendment Bill 2021, a proposed law which seeks to bring digital lenders under the regulation of the Central Bank of Kenya (CBK).

The stage is set for Parliamentary debate and approval of the bill which would have major ramifications for the digital lending industry that has grown exponentially in Kenya in recent years. From just 200,000 borrowers issued digital loans from unregulated lenders in 2016, at least two million borrowers were issued the loans in 2019 according to CBK data.

The bill was informed by widespread complaints on the unregulated nature of many mobile loan services and the documented exploitative practices of some of the companies – including unreasonably high interest rates, debt shaming, privacy infringements and reports of money laundering and terrorism financing.

They have also been accused of failing to share key information to borrowers regarding loan defaults and recovery.

Should the Bill become law the CBK will regulate, among other things, pricing of digital loans, sharing of borrowers’ information and management of digital lending firms. It gives unregulated digital lenders six months to comply with the new licensing requirements and be deemed compliant.

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Importantly, the Finance Committee also agreed to include a clause to allow digital lenders to submit reports to Credit Reference Bureaus (CRBs). Digital credit providers were frozen from filing CRB reports or listing defaulters in April 2020 amid abuse of the credit information sharing system.

The move led to a 50% decline in loans issued in the second half of 2020, according to the Digital Lenders Association of Kenya (DLAK).

CBK Governor Patrick Njoroge had earlier this year urged Parliament to enable digital lenders’ return to use of the system once the Central Bank Amendment Bill 2021 was passed establishing a watchdog and draft regulations.

“The committee agreed to the proposal so that digital lenders are allowed to disclose any positive or negative information of its customers to the licensed credit reference bureaus…The information so provided must be only that which is necessary for the discharge of the function of the digital lenders and the licensed credit reference bureaus,” the committee noted in its review of the Bill.

The bill places digital lenders under the ambit of CBK much like commercial banks, saccos and micro-finance institutions. The committee, however, dropped a requirement that would have seen CBK determine minimum liquidity and capital adequacy requirements for digital lenders in Kenya like it does for banks.

The committee argued that as they were not deposit-taking entities, the digital credit providers posed no threat to public funds.

To counter money laundering and terrorism financing, the Bill requires digital lenders to disclose sources of the money they are lending.

“The committee has explicitly granted CBK powers to determine pricing parameters.

“This will ensure that CBK does not necessarily set the lending rate but rather provide parameters within which digital credit providers shall set the cost of credit,” observed Digital Lenders Association of Kenya (DLAK) Chairman Kevin Mutiso.

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