Companies advancing exorbitantly priced loans to Kenyans and using crude recovery methods will now have to reconsider their mode of operations after coming under the purview of the Central Bank of Kenya (CBK). 

This is even as analysts noted that while the law is aimed at protecting retail consumers of credit, its current provisions may have unintended consequences for the foreign debt investment landscape in Kenya. The new Act is expected to cure concerns by many, including regulatory bodies, that the firms cashing in on the digital credit craze are milking Kenyans dry and getting away with it under the guise of financial inclusion.

The CBK has in the past noted that many of the lenders practice predatory lending.

Late last year, CBK said that five dominant companies providing vehicle, motorcycle and asset financing to low-income borrowers across the country wre operating without authorisation.

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The credit providers, which include firms offering the fast growing ‘buy now pay later’ services, will now be regulated by CBK following the assent of the Business Laws (Amendment) Bill by President William Ruto, which amends the Central Bank Act to include non-deposit taking credit providers. 

These lenders have been on the rise in the recent past as cash strapped Kenyans troop to their shops and mobile apps seeking items on credit. CBK recently started regulating mobile lending apps that have also been criticised for high interest rates and uncouth debt collection.

While it has received hundreds of applications from mobile lenders that are willing to be regulated, only a handful have gotten the approval from CBK, with more still using the lending and debt collection mechanisms that nudged the government to consider regulating them. 

The amended law, as the National Treasury has in the past argued, will ensure that all non-deposit taking credit providers which were previously unregulated, are regulated by the Central Bank.

It seeks to provide for licensing, approval of channels of credit and parameters of credit. It also seeks to provide for sharing of credit information.

“The Bill amends the Central Bank Act, to replace ‘digital lenders’ with ‘non-deposit-taking credit providers’ to expand the regulatory framework to include non-deposit-taking credit providers that  are largely unregulated; and to create a licensing and supervision structure for non-deposit-taking credit providers to ensure financial stability and protect consumers,” said a brief by State House after Ruto signed into law the Bill.

“Additionally, the Bill modernises and codifies new financial mechanisms, such as peer-to-peer lending frameworks and ‘buy now, pay later’ agreements to guarantee consumer protection.”

It added that the new Act will boost financial stability by expanding the Central Bank of Kenya’s regulatory mandate to include non-deposit-taking credit providers. 

CBK is now expected to start enforcing a binding code of conduct for non-deposit-taking providers to standardise operations and  protect consumers. 

Unintended consequences

In an earlier analysis, business advisory firm PwC had noted that once enacted into law, “all non-deposit taking credit providers and credit guarantee companies will now have to adhere to new CBK licensing and reporting requirements.”

“This enhanced oversight reflects a more rigorous approach to non-traditional credit, which could enhance trust and consumer protection but may lead to increased compliance obligations and costs for providers,” said PwC.

Law firm Bowmans noted that while the amendment is aimed at protecting consumers, it might have unintended consequences of roping in foreign investment banks, investment funds, and other international lenders who provide debt financing to Kenyan companies. 

It noted that the new Act would require such lenders to establish local subsidiaries in Kenya and obtain licences from CBK, adding that the new law should have excluded corporate lending, which would ensure consumer protection and at the same time avoid restricting corporate access to foreign debt capital. 

“While the Business Laws (Amendment) Bill 2024 aims to protect consumers and regulate credit businesses, its current provisions may have unintended consequences for the foreign debt investment landscape in Kenya,” said Bowmans in an earlier analysis of the Bill.

“By revising the Bill to exclude corporate lending or introducing thresholds for credit agreements, Kenya can safeguard its position as an attractive destination for foreign capital.

“These changes would help maintain a robust regulatory environment while facilitating access to debt capital for Kenyan businesses, ensuring they remain competitive in the global market.”

The new Act has a six-month transition period for non-deposit-taking businesses to comply with the new provisions.

It expands CBK’s mandate of regulating what is largely a new industry segment after the review of the CBK Act saw it start regulating digital lenders.

It started regulating digital credit providers in 2022 and has to date licensed 85 following the last licensing of seven DCPs announced in June 2024.

“CBK has received more than 730 DCP applications since March 2022 and has worked closely with the applicants in reviewing their applications,” said the financial regulator in a recent statement. 

“Additionally, CBK has engaged other regulators and agencies pertinent to the licensing process, including the Office of the Data Protection Commissioner. The focus of the engagements has been inter alia on business models, consumer protection and fitness and propriety of proposed shareholders, directors, and management.”

“This is to ensure adherence to the relevant laws and importantly that the interests of DCPs customers are safeguarded. We acknowledge the efforts of the applicants and the support of other regulators and agencies in this process.”

CBK in December last year said the five largest companies providing vehicle, motorcycle and asset financing to low-income individuals across the country are operating without authorisation. 

The five lending firms have expanded their operations nationwide backed by global venture capital and have earned millions of shillings in profits from lending to low-income borrowers in return.

Lending firms have come under scrutiny for engaging in predatory lending practices. Numerous customers have voiced their concerns about being unable to settle the exorbitant interest rates, which result in them paying more than the initial cost of the goods.