In February, the Central Bank of Kenya (CBK) and the Treasury announced that they are preparing a law that will cover digital mobile lenders. It was during this period that the CBK Deputy Governor Sheila M’Mbijjewe shared that a suicide incident had been reported to the regulator in November 2019. A lady went to the Central Bank to explain to the Governors that her husband had committed suicide after getting involved with one of the digital lenders. This highlighted the threat posed by digital lenders and the need to increase their regulation.

The current position is that there is no legal framework governing digital borrowing platforms and other financial products and services. Other than the law of contract, digital lenders have been operating without any legal parameters. To bring digital lenders into the ambit of regulation, Honorable Oroo Oyioka, the Member of Parliament of Bonchari has sponsored an amendment bill of the Central Bank of Kenya.

The primary object of the Bill is to amend the Central Bank of Kenya Act in order to ensure that the Central Bank of Kenya regulates the conduct of providers of digital financial products and services and financial products and services. This amendment will give the Central Bank of Kenya an obligation to ensure that there is a fair and non-discriminatory marketplace for access to credit.

New Proposed Definitions

(2A) In subsection (1) (da)–

Digital financial product means a digital facility or an arrangement through which, or through the acquisition of which, a person makes a digital financial investment, manages digital financial risk, or makes a non-cash payment.

Digital financial service means the provision in relation to a digital financial product, financial product advice, market, administrative or management services or credit under a regulated credit contract.

Financial product means a facility or an arrangement through which, or through the acquisition of which, a person:

(a) makes a financial investment

(b) manages financial risk; or

(c) makes a non-cash payment.

Financial service means the provision in relation to a financial product:

(a) of a credit service

(b) financial product advice

(c) dealing in a financial product

(d) market for a financial product; or

(e) administration or management.

The Bill seeks to amend section 4 A (d) of 2014 which provides that the other objects of the Central Bank of Kenya shall be to “formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems.”

The amendment adds the following new paragraphs:

“(da) regulate and supervise the conduct of providers of digital financial products and services;

(db) regulate and supervise the conduct of digital credit providers and digital credit service providers;

(dc) regulate and supervise the conduct of providers of financial products and services;

(dd) regulate and supervise the conduct of financial services;”

The other amendment adds new sub-sections to subsection 2, which are basically the new definitions under section 2A. These are definitions for the terms Digital financial product, Digital financial services, Financial product and Financial service all which have been discussed above.

Issues

Unethical behavior by some digital lenders got this budding industry here. In June, the Digital Lenders Association of Kenya (DLAK) issued a statement distancing itself from two online credit operators over debt shaming practices on borrowers who default on loan repayment. The statement from DLAK said that digital lenders Opesa and Okash were known for invading a customer’s privacy which is against the Kenyan data protection laws and has further tainted the reputation of digital lenders in Kenya.

Through the DLAK Chairperson Robert Masinde, the statement said that the practice by Opesa and Okash of reaching out to people in their customer’s contacts list in a bid to recover the funds can have long term effects on psychological well-being of people. It can also damage relations. With the Bill now in Parliament, the Central Bank will be looking into dealing with that unethical practice.

The issue of privacy and financial institutions handling third party information has been litigated before in the Kenya Bankers Association v Attorney General & another; Central Bank of Kenya (Interested Party) [2019] case. In this case, an amendment that required banks to demand next of kin contact details from all customers opening accounts was found to be unconstitutional.

Therefore, in the same spirit, any technology with the ability to retrieving contacts, and using them without consent is in breach of the Constitutional right to privacy and the Data Protection Act, 2019.

Impact on Different Sectors

Technology sector:

This amendment will bring fin-tech players under the ambit of a regulator. Digital lending technology and those who use it will have to be in compliance with CBK laws and regulations.

Financial services sector:

The amendment will bring sanity into the sector as the regulation of loaning rates will have the industry lose the labels “loan sharks” and “digital shylocks.” This will build more confidence in the industry and enable the digital lenders to have a positive effect on the lives of their customers.

Trade sector:

Sanity in the sector will enable SME’s to be able to access credit and create a clear way of being listed as a defaulter.

Data Protection and privacy:

Regulation in the sector will lead to the players adhering to the high client privacy and confidentiality standards that are part of banking. This will make it easier for players in the sector to comply with data protection law.

Conclusion

The Bill is timely since there is no legal framework governing digital borrowing platforms and other financial products and services. It gives the Central Bank of Kenya an opportunity to bring sanity into the sector while working with stakeholders such as DLAK in ensuring that there is a fair and non-discriminatory marketplace for access to digital credit.