Balancing access to digital lending with appropriate regulation in Kenya

A different regulatory approach Specific regulation of digital lending does not appear to be common in most markets across the globe. Most countries do not have a regulatory framework that distinguishes between digital lenders and traditional non-deposit taking microfinance institutions (MFIs). This is perhaps because ‘digital lenders’ can be regarded as non-deposit taking microfinance institutions that advance credit through digital applications as is the case in Kenya.

As is the case with non-deposit taking MFIs, these require some form of licensing to operate. In Kenya, the CBK currently issues a letter of no objection approving the operations of a non-deposit taking MFI whether they are a digital lender or operate a brick and mortar lending institution.

Several countries have licensing as a core feature of the regulatory framework in relation to digital lenders, which implies that governments see licensing as an effective means of enforcing supervision in the financial services sector. However, a country such as Poland illustrates that licensing may not be necessary where there is an effective consumer protection regime that can be enforced against lenders by a supervisory agency such as the consumer protection and competition regulator. Given that the mischief that Kenyan regulation is seeking to address is effective consumer protection, focus ought to be on the implementation of a consumer credit code that will protect consumers of credit rather than restricting the provision of credit to those who may otherwise not have access to capital.

The licensing approach that the Bill proposes of having minimum capital requirements is ideal in prudential regulation of deposit taking institutions such as banks and other deposit taking MFIs. However, given that a majority of digital money lenders are non-deposit taking MFIs who finance their operations from privately sourced funds, it would be unfair to subject them to prudential regulation such as having in place minimum capital requirements as they are not using public funds to finance their operations.

From a consumer protection perspective, it is best practice to require transparency in the information provided to prospective borrowers. Currently, the Consumer Protection Act and the Competition Act require that lenders provide sufficient precontractual information to borrowers to enable them to provide fully informed consent to the terms and conditions associated with the loan being advanced. This may be bolstered by consumer credit legislation that would also allow the CBK to enforce such provisions. Such a framework is advisable as it balances between the viability of the business for the lenders, and the interests of the borrowers.

Final thoughts In light of the emerging nature of the non-deposit taking digital lending industry in Kenya, a complicated licensing framework specific to the digital lending industry may stifle its growth. A more appropriate regulatory model would be one that enhances consumer protection through regulation of the conduct of credit providers (digital lenders and others). This can be achieved through the development and enactment of a consumer credit code that embeds the principles of consumer protection in lending. All non-deposit taking providers of credit to the public, regardless of their business model, would be bound by a set of consumer protection principles. This may be an ideal way of achieving the objective of regulation of digital lenders as envisioned in the Bill.

The enforcement of such a consumer credit code should be vested in a regulator such as the CBK or another agency with a strong consumer protection mandate (for example, the Competition Authority. The code should provide for registration, but not necessarily licensing, of consumer credit providers (including digital lenders) to make it easier for the relevant regulator to monitor their conduct and take enforcement action in the event of a violation of the code.

That said, the Bill’s overall effort to regulate Kenya’s digital lending industry is helpful insofar as it addresses some of the limitations of self-regulation. At the end of the day, the Bill ought to demonstrate stakeholder consultation and pave the way for closer collaboration between different existing regulators and supervisory organisations. Whilst a lack of well-defined consumer-centric regulation clearly disadvantages digital lending consumers, it could also cripple the digital lending industry in the long-term and thereby deny access to credit for those who need it.