The Dawn of FinTech Regulation for Digital Lenders

FinTech plays a crucial role in boosting financial inclusion of underserved segments of the population. Digital credit financing is increasingly being channelled towards supporting cashflows of households and micro, small and medium-sized enterprises.

The advent of digital lending was brought about by various factors including advances in technological innovations, social and economic barriers to traditional sources of credit and more recently, the unprecedented COVID-19 pandemic, which propelled digitisation to the forefront.

For a while, Kenya suffered a digital lending regulatory lacuna because we had no regulations governing these products. This resulted in public outcry when a few rogue digital lenders took advantage of the unregulated space. We saw a range of malpractices including excessively high costs of credit, unethical debt collection practices and abuse of personal information.

It is widely accepted that to protect vulnerable consumers and maintain market stability, we need regulation. On the other hand, regulation must not be seen stifle competition or hinder innovation by repressing the development of new products and services that are able meet the minimum confidence thresholds.

To cure this regulatory gap and create fertile ground for digital lending innovation, the Central Bank of Kenya (CBK) (Amendment) Act, 2021 came into force in December 2021. The Act grants the CBK supervisory powers over digital credit providers.

The CBK now has the power to issue, suspend or revoke digital credit licenses, approve channels through which digital credit business may be conducted, determine parameters for pricing of digital credit or direct any other actions as it may consider necessary. The Act also promotes regulatory integration and coordination, by requiring CBK to consult with other relevant regulators.

To give effect to the CBK (Amendment) Act, the CBK (Digital Credit Providers) Regulations, 2022 became operational on 18^th March 2022. The new Regulations provide for the licensing, governance and credit operations of digital credit providers. The Regulations make provision for consumer protection, credit information sharing, data privacy and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).

To qualify for a digital credit license, an applicant must be a company incorporated under the Companies Act, 2015 and ensure that its significant shareholders, directors and senior officers meet the fit and proper criteria set out in the Regulations.

Similar to other CBK regulated financial institutions, new digital credit providers seeking a licence are first required to submit their proposed names to the CBK for approval before proceeding to incorporate a company with the Registrar of Companies. Upon submission of a digital credit licence application with the CBK, the CBK may grant or reject the application within sixty (60) days from the date of receipt of the application.

As for existing and previously unregulated digital credit providers, they are mandated to apply for a license within six (6) months of the publication of the Regulations. This means that existing digital credit providers have until 17^th September 2022 to apply for a licence or cease operations.

To get a licence, a digital credit provider is required to complete an online licence application form. The application is submitted together with a myriad of supporting documents including system and channel descriptions, credit terms and conditions and specified policies and documents for review, testing and final approval by the CBK.

Once a digital credit provider procures its licence, it must be careful to comply with the regulatory obligations and conditions prescribed by the CBK and the other regulators. Failure to do so could cause the licence to be suspended or revoked.

Suspension or revocation of a licence could also occur where an applicant falsifies its licence application information, carries out activities outside the scope of licensed activities, fails to pay annual fees or monetary penalties or conducts business in a manner detrimental to the interests of its customers or members of the public. Failure to comply could also lead to imprisonment, fines and/or penalties upon conviction.

Across the spectrum of the country’s financial services sector, FinTech is experiencing a massive growth explosion. FinTech potential is infinite and spans across multitudes of financial products including digital banking, credit and payments, wealth management, insurance, equity crowdfunding and blockchain.

This booming sector is vast, and it is soaring. The financial regulatory framework is evolving alongside with it. A collaborative approach amongst FinTech providers, regulators, and stakeholders will help positively shape the policy direction of FinTech.

Entities that are involved in digital credit business and FinTech in general should therefore embark upon a compliance transformation journey by seeking legal and regulatory advisers to help them fully understand their compliance obligations, assess and obtain assurance on the sustainability of their legal and governance structures and ensure that their corporate practices and policies comply with the law.

Caroline Kipkulei is a Legal & Regulatory Compliance Advisory Manager at PwC Kenya.