Non-deposit-taking microfinance banks are being forced to apply for digital credit licences to continue issuing loans in the absence of standalone regulations for their lending business as provided for in law.
The Central Bank of Kenya (CBK) has now moved to enforce the requirement amid an outcry from the credit-only microfinance institutions (also known as non-deposit-taking microfinance institutions), which are already licensed under the Microfinance Act of 2006.
The regulator’s enforcement is on the back of the October 2022 court case in which the High Court held that non-deposit-taking microfinance institutions be treated as digital credit providers (DCPs) and therefore subjected to the CBK (Digital Credit Providers) Regulations that started in the same year.
The Microfinance Act of 2006 covers both deposit-taking and non-deposit-taking microfinance banks.
Caroline Karanja, the CEO of the Association of Microfinance Institutions Kenya (Amfi), an umbrella body for microfinanciers, confirmed the development.
Ms Karanja appealed for the speeding up of the process of coming up with separate regulations for non-deposit-taking microfinance institutions as provided for in law.
“We are using technology and commercial banks use technology too. Are they called digital credit providers? They are not. Why would you want to make microfinance institutions who have a Microfinance Act in place to be called who they are not?” said Ms Karanja in a phone interview.
“Our credit-only microfinance institutions who are under the Microfinance Act are the ones now being subjected to apply for DCP licences. We would rather we are issued with our own regulations. We don’t think DCP regulations are a good fit for us.”
The development means that the credit-only microfinance institutions will be subjected to regulations such as not listing defaulters of loans of Sh1,000 and below and not charging interest that exceeds the principal owed at the time a loan falls into default.
They will also be required to ensure professionalism when going after defaulters since the regulations bar them from using obscene language or making unsolicited calls or messages to a customer’s contacts in the name of recovering defaulted loans.
Ms Karanja added that about five of Amfi members have received CBK clearance while many others are still waiting as the regulator asks for additional requirements. The CBK on July 7 said it has since March 2022 received more than 550 applications — drawn from digital lenders and microfinanciers — but has cleared just 58.
The CBK allows those with pending applications to continue operating in line with the regulations, pending determination of the application.
Only the 14 deposit-taking microfinance banks under CBK regulations were spared from the DCP regulations, which have a clause indicating that they are not applicable to institutions licensed under the Banking Act, Microfinance Act, 2006 and Sacco Societies Act, 2008.
Amfi had argued in court that their services are not offered solely on digital platforms like DCPs hence they should not be lumped together with DCPs. However, this was thrown out, with the court observing that credit-only microfinanciers were yet to be regulated as contemplated under Microfinance Act 2006.
The lobby took issue with the fact that no regulations had been finalised under section 3 of the Microfinance Act but the judge held that “it is within the sole mandate of Parliament to decide when to legislate, what to legislate and how much to legislate and to decide the timing, content and extent of legislation.”
Amfi has been pushing for the regulations over the years. Former Treasury Cabinet Secretary Njuguna Ndung’u, who was fired early last month, had given the lobby some hope with the formation of a committee, which went through the draft regulations and made improvements. They had agreed on a stakeholder forum in September.
However, failure by the government to come up with regulations for non-deposit-taking microfinanciers as provided for in the Act, offered a regulatory lacuna that has seen these institutions pushed to regulations that were primarily targeting firms offering credit on digital platforms.
