Digital credit providers (DCPs) in Kenya will have to disclose their sources of funds and provide evidence of the same after a law meant to regulate the sector came into effect.
The new regulations published Monday by the country’s financial regulator, the Central Bank of Kenya (CBK), also require digital lenders to get a license from the country’s monetary authority or wind down their operations by September 2022. The digital lenders were previously only required to register the businesses to begin operations in the country.
Disclosing the source of funds, the CBK said, is meant to ensure that lenders are not engaging in financial crimes like money laundering.
“A digital credit provider shall provide to the Bank (CBK) the evidence and sources of funds invested or proposed to be invested in the digital credit business and demonstrate that the funds are not proceeds of crime,” read the DCP regulations.
Development Financial Institution (DFIs), commercial banks, private equity firms and high-net-worth individuals are some of the popular sources of funding, especially debt, which is used for onward lending by creditors in the digital space.
The new regulations come into effect after the country’s president, Uhuru Kenyatta, assented to the CBK Act in December last year, giving the bank the authority to issue digital lenders licenses and to ensure “the existence of fair and non-discriminatory practices in the credit market,” bringing order to a sector that had for years regulated itself.
Kenya is home to over a hundred lending apps, which are popular for their unsecured and instant loans disbursed through mobile phones. However, concerns have been raised about how most of them operate – with some accused of exploitative interest rates and debt-shaming recovery tactics. Among the popular apps are Silicon Valley-backed Tala and Branch, as well as Zenka Finance, which is owned by Latvian businessman Aigars Kesenfelds. Others are Opesa, Okash and Credit Hela, which are all linked to Chinese-billionaire Yahui Zhou.
With the new law, digital lenders will have to disclose all conditions and fees for loans, including interest rates, and the total amount to be paid back. They will also be required to seek the bank’s approval before changing their pricing models.
Additionally, they have been banned from sharing customer data with third parties and from using threatening language, accessing or getting in touch with their customer’s phone contacts, and using “unconscionable debt collection tactics.”
“The Regulations seek to address concerns raised by the public given the recent significant growth of digital lending particularly through mobile phones. These concerns relate to the predatory practices of the previously unregulated digital credit providers, and in particular, their high cost, unethical debt collection practices, and the abuse of personal information,” said the CBK.
“The Regulations provide for inter alia the licensing governance, and lending practices of DCPs. They also provide for consumer protection, credit information sharing, and outline the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations of DCPs.”
Digital lenders who flout the new regulations, including sharing the personal data of loan defaulters with third parties, risk penalties or license withdrawals.