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Legal Alert: Recent Amendments in Kenyan Business Laws Impacting Digital Credit Providers and Microfinance Institutions

Recent Amendments in Kenyan Business Laws Impacting Digital Credit Providers and Microfinance Institutions

Introduction

In December 2024, the Business Laws (Amendment) Act came into effect, introducing significant changes that will impact Digital Credit Providers (DCPs) and non-deposit-taking microfinance institutions in Kenya. These changes are set to reshape the regulatory framework for the financial services sector, with particular focus on licensing requirements, regulatory compliance, and operational conduct for credit providers across the country.

At CR Advocates LLP, we understand the importance of staying informed about legal developments that affect businesses. Here’s a detailed look at the key amendments and what they mean for businesses in the digital credit and microfinance sectors in Kenya.

1. Reclassification of Digital Lenders under the Central Bank Amendment Act

The Central Bank Amendment Act has introduced a crucial change by replacing the term “Digital Lenders” with the broader category of “Non-Deposit Taking Credit Providers (NDTCs)”. This shift has far-reaching implications for digital lending platforms and other credit providers that do not accept deposits.

What does this mean for businesses?

Digital Credit Providers now fall under the expanded category of Non-Deposit Taking Credit Providers (NDTCs). This change ensures that both digital lenders and traditional microfinance institutions are regulated under the same legal framework, broadening the scope of oversight by the Central Bank of Kenya (CBK).
Regulatory Alignment: This reclassification aligns digital credit services with other forms of non-deposit-taking financial services, including microfinance institutions, thereby subjecting digital lenders to stricter regulatory requirements under CBK oversight.
For businesses involved in digital lending, this amendment means an increased need for compliance with the regulatory framework governing non-deposit taking credit providers, including licensing, reporting obligations, and governance.

2. Amendments to the Microfinance Act, 2006: Licensing and Regulation of Non-Deposit-Taking Microfinance Institutions

In line with the new regulatory changes, the Microfinance Act, 2006, has been amended to include specific provisions for non-deposit-taking microfinance institutions. These institutions now face a requirement to apply for a license from the Central Bank of Kenya (CBK) within six months of the Act’s commencement.

What is required from non-deposit-taking microfinance businesses?

Licensing Requirement: Any institution engaged in non-deposit-taking microfinance activities must apply for a license within six months of the commencement of the amendment, i.e., by June 27, 2025. During this period, businesses can continue operating while their application is processed, provided they comply with all regulatory requirements.
Regulatory Compliance: Non-deposit-taking microfinance institutions must adhere to the provisions of the Microfinance Act, including operational guidelines set by the Central Bank of Kenya. Institutions are also subject to conditions issued by the CBK, including those related to capital adequacy, governance standards, and reporting obligations.
This amendment is particularly relevant for businesses that have been operating as non-deposit-taking microfinance institutions, as they now face additional regulatory obligations and the need to obtain a license to continue their operations legally.

3. Key Compliance Considerations for Businesses in the Sector

For businesses operating as Digital Credit Providers or non-deposit-taking microfinance institutions, the following compliance considerations are essential:

Timely Licensing Application: Ensure that your application for a non-deposit-taking microfinance license is submitted within the six-month deadline. This is critical to avoid operational disruptions and ensure continued business operations in compliance with the law.

Adherence to Central Bank Regulations: As a Non-Deposit Taking Credit Provider, businesses must comply with the full regulatory framework set out by the Central Bank of Kenya. This includes ensuring that you meet the requirements for capital reserves, risk management practices, and consumer protection measures. Institutions should familiarize themselves with these requirements to avoid any compliance lapses.

Governance and Risk Management: With stricter regulations in place, businesses must ensure they have robust governance structures and effective risk management strategies to meet the new standards. This includes ensuring that all internal controls and reporting mechanisms are aligned with the latest regulatory expectations from the Central Bank of Kenya.

Conclusion

Navigating the Changing Legal Landscape for Credit Providers
The amendments to the Central Bank Amendment Act and the Microfinance Act mark a pivotal moment for the regulation of Digital Credit Providers and non-deposit-taking microfinance institutions in Kenya. These changes are aimed at creating a more cohesive and regulated financial services environment in the country, with a strong emphasis on consumer protection, transparency, and stability within the financial sector.

For businesses operating in these sectors, it is crucial to act swiftly and ensure compliance with the new licensing requirements and regulatory obligations. By obtaining the necessary licenses and aligning operations with the new legal framework, businesses will not only stay compliant but also safeguard their long-term viability within the financial services market.

At CR Advocates LLP, we understand the complexities of the regulatory environment and are committed to helping businesses navigate legal changes that affect their operations. Staying updated on such legal developments is vital to ensuring that your business remains compliant and well-positioned for success in Kenya’s evolving financial services industry.

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“The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.”

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