WHO IS THE TARGET?
The Regulations will affect all persons conducting digital credit business which is not regulated under any other written law.
The Regulations do not apply to lenders who are already regulated under any other written law including:
- Institutions licensed under the Banking Act;
- Institutions licensed under the Microfinance Act;
- Saccos under the Sacco Society Act;
- Kenya Post Office Savings Bank is supervised under the Kenya Post Office Savings Bank Act;
- Entities already approved by the CBK;
- Entities whose credit business is regulated under any other written law; and
- Credit arrangements between persons in the sale of goods or provision of services transactions in their ordinary course of business.
Regulation 5 prohibits any person from establishing or carrying out a digital credit business in Kenya unless licensed under the Act as well as the regulations. Consequently, all those conducting digital credit business which is not regulated under any other written law are required to apply to the Central Bank for a license within six months of publication of the Regulations. As such, all Digital credit lenders have until September 2022 to make applications for licenses to the Central Bank.
For an entity to qualify to apply for a licensing to the Central Bank, it must;
- Be a company incorporated under the Companies Act;
- Directors, Shareholders, and Chief Executive officers meet the requirements of the Third Schedule to the Regulations, which sets out the criteria for determining the professional and moral suitability of Directors and Senior Officers as well as the Criteria for determining the moral suitability of significant shareholders.
The requirements for licensing are provided for under Regulation 6 wherein an application under form CBKDCP1 shall be submitted together with;
- Certified copies of the applicant’s certificate of incorporation, Memorandum, and Articles of Association.
- Notification of the applicant’s registered address.
- Certified copy of Memorandum and Articles of Association of any corporate body and/or any unincorporated body that holds significant shares in the applicant entity;
- Description of the ICT system to be used in the applicant’s operations and independent assurance on the system;
- Description of delivery channels or platforms to be deployed, and the terms and conditions of the credit facilities that the applicant intends to provide;
- An agreement with telecommunication or another service provider for the provision of the platform for the provision of digital credit;
- Applicant’s Anti-Money Laundering combating, data protection, and consumer complaints handling mechanisms, policies and procedures;
- Evidence of the source of funds to be invested in the applicant’s business;
- Details of all shareholders, directors, Chief Executive Officer, and all senior officers of the applicant;
- A sworn declaration signed by all the officers in (i) above;
- The applicant’s pricing model and parameters, corporate governance policy; and
- Any other information required by CBK.
The Bank shall charge an application fee of Kshs. 5,000.00 and Kshs, 20,000 on the granting of a licensing which is payable annually as per the Fourth Schedule.
The CBK then assesses the application while considering the history of the applicant, the professional and moral suitability of its officers, the source of funds to be invested in the applicant’s credit business, and all matters relating to the public interest, and grants a license within 60days.
SUSPENSION OR REVOCATION OF LICENCE
Regulation 9 sets out the circumstances under which a license may be suspended or revoked which include giving false information, carrying out activities outside the scope of the licensed activities, and breach of the provisions of the Data Protection Act or the Consumer Protection Act, etc.
Suspended digital lenders will have their names published in the Kenya Gazette within thirty days of the suspension or revocation.
The Regulations make provisions as to the exchange, the requirement of consent, and restrictions relating to credit information. They require a Digital Credit provider to seek customer consent in the event that they intend to furnish negative information to a bureau. Such notification can be in writing or through electronic means at least thirty days before submitting the negative information.
There is, however, no penalty for the breach of these requirements, and as such any sanctions may fall under regulation 9 on suspension and revocation of license.
Regulation 17 requires full disclosures of the terms and conditions of the loan to the borrower including-
- Charges and Fees and the circumstances under which they may be imposed;
- Interest rate to be charged and whether on a reducing balance or not;
- The total cost of credit which include the principal amount, interest, fees, and charges;
- The date on which the amount of credit and all interest, charges, or fees are due and payable; and
- Customer complaint handling procedures
Regulation 19 puts a limit to the interest recoverable from non-performing loans being the sum of-
- The principal owing when the loan becomes non-performing;
- Interest, in accordance with the contract between the customer and the digital credit provider, not exceeding the principal owing when the loan becomes non-performing; and
- Expenses incurred in the recovery of any amounts owed by the customer.
METHODS OF CREDIT COLLECTION
Regulation 20 provides restrictions on the methods of credit collection that a digital lender can use in recovering the funds. More specifically, they prohibit the following activities;
- Use of threat, violence, or other criminal means to physically harm the person, or his reputation or property;
- Use of obscene or profane language;
- Make unauthorized or unsolicited calls or messages to a customer’s contacts;
- Improper or unconscionable debt collection tactic, method, or conduct
The Regulations do not make any express requirements on periodical reporting by digital credit providers to the Central Bank. They however create an obligation on the digital credit provider to make its books and records readily available to the bank for inspection and other supervisory purposes. This, therefore, requires digital credit providers to be at the ready whenever any information is required.
ENFORCEMENT AND ADMINISTRATIVE SANCTIONS
There are also other administrative sanctions that may be administered by CBK where there is non-compliance with the provisions of the CBK Act, the Regulations, or any directives given by CBK in relation to the conduct of digital credit business. These include monetary penalties on the Digital
Credit providers, its directors, officers, or employees responsible for the non-compliance not exceeding Ksh. 500,000.00, additional penalties not exceeding Kshs. 10,000.00 for each day of the continued non-compliance, suspension from office, and disqualification from holding any position or office in any licensed or financial institution.
The Regulations are a step in the right direction. Great care was taken in order to ensure that the need for regulation of a fast-emerging industry does not stifle the promise of growth in the provision of credit facilities. However, the Regulations still leave some significant gaps where key consumer protection concerns have not been addressed. Whilst key consumer protection principles have been highlighted in the regulations, some key principles have not been exhaustively provided for such as the transparent pricing principles, fairness in dealing with consumers as well as marketing guidelines that all digital credit providers must abide by. Further, complaints redress still requires a more comprehensive provision and the same being left to the individual credit providers still creates potential gaps of consumer exploitation.
This alert is for informational purposes only and should not be taken or be construed as a legal opinion. If you have any inquiries or need any clarification as to how these regulations may affect you, please do not hesitate to contact us through Alakonya & Associates (firstname.lastname@example.org) or Zakayo Alakonya – Managing Partner (email@example.com) or Caroline Rono – Partner (firstname.lastname@example.org) or Teresa Kehonji (email@example.com).