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NEW REGULATIONS FOR NON-DEPOSIT-TAKING MICROFINANCE INSTITUTIONS.

The Microfinance Act Number 19 of 2006 had for a long time had to stretch its wings wide enough to address the interests of both the Deposit and Non-deposit taking Microfinance institutions.

However, the Central Bank of Kenya; the Key player in the statute and the finance sector generally, appears to have taken a deep interest in the deposit-taking institutions, much to the detriment of the non-deposit-taking microfinance institutions. The Act had placed an imperative obligation on the Central Bank to develop regulations to govern the operations of the non-deposit-taking institutions. The same has not been done till date, leaving the institutions ungoverned so to speak.

In this article, we look into the trajectory taken by the High Court of Kenya, when called upon to step into the shoes that have perhaps proven extremely humongous for the Central Bank of Kenya, but before we do that, let us ask these questions: what is a non-deposit taking micro finance institution? Where is the dichotomy between a deposit and non-deposit-taking institution?

Well, a non-deposit-taking institution is one that does not take cash or deposit collaterals from Individuals before advancing credit. They are licensed by the Central Bank of Kenya.

In the absence of specific regulations, what are the applicable regulations applied in their governance?

The current position is found in the decision made by Learned Justice Odunga (as he then was) in Machakos High Court Petition, Association of Micro-Finance Institutions Kenya (AMFIK) vs The Central Bank of Kenya & 3 others (Constitutional Petition E008 of 2022) [2022

The gist of the matter was that, the National Assembly enacted the Central Bank of Kenya (Amendment) Act, 2021 (Hereinafter referred to as the “Amendment Act”), assented into law on 7th December 2021 and commenced on 23rd December 2021; with the aim of Act being to regulate the Digital Credit Providers, thus culminating to the crafting and gazettement of the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 (Hereinafter called “DCP Regulations”).

The Amendment Act under Section 7 introduced Section 59 to the Central Bank Act; and under sub-section 2 provided that any digital credit business that is not regulated under any other law shall be required to apply for a license.

The overall effect of Section 59 of the Amendment Act is that, non-deposit taking Microfinance businesses shall also be required to apply for the digital license, by dint of the said sub-section, they are not regulated under any other law despite being subject to the provisions of Section 3 of the Microfinance Act, 2006, and there being discussions by an Inter-agency committee on coming up with regulations specific to non-deposit taking Microfinance businesses.

The Association of Microfinance Institutions – Kenya on behalf of its members filed a petition challenging the constitutionality of the Amendment Act, and consequently, judgment in the matter was rendered on 22nd September 2022, dismissing the petition.

Therefore, as it stands and in the absence of regulations from the Central Bank of Kenya, the non-deposit-taking microfinance institutions must seek licenses, similar to those sought by digital lenders.

But where does this then leave non-deposit microfinance Institutions that don’t operate digitally? Was this a miss by the High Court?

It is our contention that unless the much awaited regulations come to life sooner rather than later, they will continue operating as they wish.

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