“Bwana P, mueleze ndugu yako Bwana X alipe deni lake alilokopa kutoka Tala”
“Mr P, kindly inform your brother Mr X to repay the loan advanced to him from Tala.” Were you irritated when you received a call and the caller uttered these words? Well, loans from digital credit providers have caused flummoxing effects on the borrowers. Yesterday, they rescued you from a financial crisis. Today, you’re holding a pen and a notebook, anticipating the next caller to include in your block list because of the unending calls from infuriating debt collectors. Tomorrow who knows? They might just be calling your fiancée or your client requesting him/her to pressure you to service your loan.
On 18th March 2022, the Central Bank of Kenya made a very triumphant step towards instilling a sense of organization in the chaotic world of digital credit. Our team has empirically read through the recently published CENTRAL BANK OF KENYA (DIGITAL CREDIT PROVIDERS) REGULATIONS, 2022 and prepared a brief commentary that highlights the salient features of these regulations.
- To whom do the regulations apply?
The regulations as written are very self-sufficient. Demonstrative of that is regulation 2 which gives a list of institutions that are exempt from complying with these regulations. They include institutions licensed under the Banking Act, institutions licensed under the Microfinance Act, 2006, Sacco societies licensed under the Sacco Societies Act 2008, the Kenya Post Office Savings Bank supervised under the Kenya Post Office Savings Bank Act, credit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provision of services by the person whose primary business is the provision of the goods or services, entities whose digital credit business is regulated under any other written law and any other entity approved by the Bank.
The regulations apply exclusively to persons carrying out digital credit business. In other words, the regulations came in to regulate mobile money lending forums.
- Licensing of digital credit providers
Regulation 4 bars institutions from carrying out the business of a digital credit provider unless an application for a license was made to the Central Bank of Kenya and a license granted upon satisfaction that the institution has met the prescribed qualifications.
The documents required to accompany the application are illustrative of the rigorous framework put in place by the Central Bank of Kenya to ensure there is proper order in the world of digital credit providers.
Commendable and responsive to very grave concerns that have clouded the mobile money lending apps is the requirement that applicants must attach anti-money laundering and combating the financing of terrorism policies and procedures. Many Kenyans were for a long time puzzled by the robust ability of the digital money lenders to advance loans to the large number of citizens who default day in and day out and remain solvent. This requirement goes a long way in ensuring money laundering forums are not readily made available to those with crooked characters.
Further, applicants are required to make available all their data protection policies and procedures as well as consumer redress mechanisms, policies and procedures to the central bank. Digital mobile money lenders collect very private information from their customers, presumably for purposes of credit appraisal. The right to privacy is likewise a large bone of contention, with high fecundity for disaster if not properly guarded. The requirement that data protection policies be made available to the central bank at the point of licensing is in our assessment a very commendable move.
Other information required at the application stage include a certified copy of the certificate of incorporation of the applicant, a certified copy of the Memorandum and Articles of Association of the applicant, a notification of the applicant’s registered address, a certified copy of the Memorandum and Articles of Association of any corporate body that has a significant shareholding in the applicant, a certified copy of the constitutive documents of an unincorporated body that has a significant shareholding in the applicant, a description of the information and communication technology system to be used in the applicant’s operations and an independent assurance on the systems, a description of delivery channels or platforms to be deployed by the applicant, a description of, and terms and conditions of credit products and services which the applicant intends to provide, an agreement with a telecommunication or other service provider for provision of the channel or platform for the provision of digital credit, a description and evidence of sources of funds to be invested in the applicant, names and addresses of the shareholders, the applicant’s credit policy, code of ethics and market conduct, the applicant’s pricing model and parameters, the applicant’s corporate governance policy, certificate of good conduct, tax compliance certificate and credit reference bureau report for each of the digital credit provider’s individual significant shareholders, directors, chief executive officer and senior officers, a sworn declaration signed by every officer as specified in the application form; and any other information as may be required by the Bank.
Upon satisfaction that all the above-mentioned documents have been made available, the central bank of Kenya shall issue a license to the applicant.
- Is the grant of the license absolute?
The answer is no. where a licensed digital credit provider is found to have contravened the requirements stated above through falsification of information, violation of anti-money laundering laws or failure to pay the annual fees required, the license may be revoked or suspended.
Again, we find it important to point out the jealous manner of guardianship demonstrated by the Central Bank in these regulations.
- Activities of a digital credit provider.
Regulation 8 outlines the kind of activities that may be carried out by the digital credit providers in an elaborate fashion. This is strictly the provision of credit and any other activity approved by the Central Bank. An explicit directive is given to the effect that digital credit providers must at no particular time confer on themselves the powers enjoyed by banks and microfinance institutions by purporting to collect deposits of any nature. They must strictly restrain themselves from the business of advancing credit facilities.
- Compliance with the principles of corporate governance
Part III of the regulations, essentially regulation 13 loudly echoes the principle of confidentiality, which is very critical in instances where an institution carries out a business that involves private information from customers. The digital credit providers must ensure that information obtained from customers is only shared with the customer’s consent.
Sharing of customer information in disregard of this principle is in our view a breeding ground for litigation and other dire legal consequences.
- Submission of credit Information to licensed credit bureaus
Part IV of the regulations provides that digital credit providers may submit both positive and negative information to licensed credit bureaus to guide credit institutions on their customers’ credit histories.
A precursor is however made to the powers of the credit providers to so in regulation 14(3) which states that a digital credit provider shall not submit negative credit information of a customer or any other person to a credit reference bureau where the outstanding amount relating to the credit information does not exceed one thousand shillings.
Noteworthy also is the fact that where such information is given to a credit reference bureau, the customer must be notified of such a move within thirty days.
- Credit appraisal
There has long been a tendency by crafty finance institutions to grant loans to debtors, knowing fully that the debtor lacks the financial wherewithal to service the loan. This has been regulated by the Central bank in these regulations. Digital credit providers must investigate and ascertain the debtor’s ability to repay the loan, before issuance of the said loan.
- The Duplum rule
The duplum rule is a principle firmly entrenched in our law that interest, whether it accrues as simple or compound interest; ceases to accumulate upon any amount of capital owing once the accrued interest equals the amount of capital outstanding.
In the Kenyan finance sector, the duplum rule only featured in section 44A of the Banking Act, restricting banks from recovering interest that exceeds the principal amount in so far as non-performing loans were concerned. Institutions such as SACCOs were left uncapped. Interestingly now, regulation 19(2) provides that digital credit providers shall be limited in what they may recover from a customer with respect to a non-performing loan. Interest shall not exceed the principal owing once the loan becomes non-performing.
This is a very welcomed move in the sphere of equity to avert instances where loans accrue outrageous interest to the extent that customers become totally unable to service the same.
- Consumer protection
Regulation 21 makes it paramount for digital credit providers to issue receipts for all transactions carried out. This is a very bold step toward ensuring transparency and accountability takes centre stage in the affairs of the digital credit providers. For evidentiary purposes in instances where customers lay claims of fraud, these receipts play a very crucial role.
Consumer protection is also greatly advanced by the requirement of regulation 22 which provides that digital credit providers must establish complaints redress mechanisms, for communicating customer complaints. Not only should they establish the mechanisms but must also ensure there is proper communication of this mechanism to customers.
Regulation 28 also cautions the digital credit providers against publishing false adverts to lure unsuspecting customers into taking loans based on misrepresentation.
- Anti-money laundering and combating the financing of terrorism
The preceding parts of this article spoke about serious concerns raised by Kenyans regarding the fiscal might of these digital credit providers who remain a going concern in the wake of serial defaulting of loans already advanced. Are they schemes for generating ‘clean’ money from shady transactions?
Well, the Central bank took this concern into account while formulating the regulations; in essence regulation 30 makes it imperative for the digital credit to make available to the Bank the evidence and sources of funds invested or proposed to be invested in the digital credit business and to further demonstrate that the funds are not proceeds of crime. The competence of this requirement cannot be gainsaid.
Enforcement of laws is a grave concern in our governance ecosystem. In as much as maximum enforcement is a very colossal undertaking to make, the Central bank has put in place strenuous efforts that might ensure there’s significant compliance by the digital credit providers.
Regulation 33 provides that digital credit providers shall be subject to the Central bank’s onsite and off-site inspection, audit and monitoring and shall make such periodic reports and returns as may be specified by the Central bank. In implementing this regulation, the central bank is granted powers to request any record from the digital credit providers for purposes of inspection or audit.
If this regulation is implemented with the kind of rigours felt in its wordings, we can thus be guaranteed that the digital credit world shall be free of any demons.
The efficacy or otherwise of a law or regulation is seen when it is tested. Therefore, let us give these regulations time to be tested. This article gives a summarized commentary of the regulations. However, at CR Advocates LLP our banking and finance department team is very willing to attend to any of your concerns regarding the regulations.