Non-deposit-taking microfinance banks are forced to apply for digital credit licenses to continue issuing loans in the absence of independent regulation of lending businesses as stipulated in the law.
The Central Bank of Kenya has now moved to enforce this requirement amid protests from 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 implementation comes on the back of an October 2022 court case, in which the Supreme Court ruled that non-deposit-taking microfinance institutions should be treated as digital credit providers (DCPs) and therefore subject to the Bank of Korea’s Digital Credit Providers (DCP) rules that began in the same year.
The Microfinance Act of 2006 covers both deposit-taking and non-deposit-taking microfinance banks.
Caroline Karanja, CEO of the Association of Microfinance Institutions of Kenya (AMFI), an umbrella body for microfinance providers, confirmed the development.
Ms. Karanja called for the expedited preparation of separate regulations for non-deposit taking microfinance institutions as stipulated in the law.
“We use technology, commercial banks use technology too. Are they called digital credit providers? That is not true. Why would you want to make microfinance institutions that have a microfinance law called something other than what they are?” Ms. Karanja said in a phone interview.
“Only credit-based MFIs that are subject to the Microfinance Act are now subject to applying for DCP licenses. We would prefer to have our own regulations issued. We do not think the DCP regulations are suitable for us.”
This development means that credit-only MFIs will be subject to regulations such as not listing defaulters on loans of Sh1,000 or less and not charging interest beyond the principal due at the time a loan becomes defaulted.
They will also be required to ensure professionalism when pursuing defaulters, as the rules prohibit them from using foul language or making unwanted calls or messages to customer contacts in the name of recovering bad loans.
Ms Karanja added that about five Amfi members have received approval from the Central Bank of Kenya while several others are still waiting as the regulator asks for additional requirements. The Central Bank of Kenya said on July 7 that it had received more than 550 applications since March 2022 — from digital lenders and microfinance institutions — but had approved only 58.
The Central Bank allows holders of pending applications to continue working in accordance with the regulations, until the application is decided.
Only 14 deposit-taking microfinance banks operating under CBK regulations were exempted from the soft loan program regulations, which include a clause stating that they do not apply to institutions licensed under the Banking Law, the Microfinance Law of 2006, and the SACO Societies Law of 2008.
Amphi had argued in court that its services were not offered solely on digital platforms such as direct payment platforms and therefore should not be integrated with direct payment platforms. However, this argument was rejected, as the court noted that credit-only MFIs were not yet regulated as stipulated in the Microfinance Act 2006.
The pressure group objected to the fact that no regulations had been finalised under Section 3 of the Microfinance Act, but the judge ruled that “Parliament has the sole authority to determine when to legislate, what to legislate, how much to legislate, and the timing, content and extent of legislation”.
AMFI has been lobbying for the regulations for years. Former Treasury Secretary Njuguna Ndung’u, who was sacked early last month, gave lobbyists some hope by setting up a committee to review the draft regulations and make necessary improvements. They agreed to hold a stakeholders’ forum in September.
However, the government’s failure to introduce regulations to govern non-deposit-taking MFIs as stipulated in the law has created a regulatory loophole that has led these institutions to impose regulations that primarily target companies that offer credit on digital platforms.