(Nairobi) – Recent amendments to Kenya’s Business Laws have sparked a regulatory conflict for non-deposit taking microfinance banks (NDTMFBs), which could now be licensed under two separate laws. The changes, detailed in the Business Laws (Amendment) Bill, 2024, aim to regulate these institutions under both the Microfinance Act and the Central Bank of Kenya (CBK) Act, potentially creating challenges for businesses already licensed under the Microfinance Act.
Under the current framework, NDTMFBs are not considered deposit-taking financial entities. However, the proposed amendments in the CBK Act seek to expand the scope of digital credit providers (DCPs) to include non-deposit taking credit providers. This change could result in some NDTMFBs being classified as DCPs, creating dual regulatory oversight and complicating their licensing process, according to a legal alert from consultancy firm PwC.
PwC further warns that this expansion could require NDTMFBs to seek separate licenses and comply with regulations under both the Microfinance Act and the CBK Act, leading to a situation of conflicting requirements. In 2022, the Association of Microfinance Institutions of Kenya (AMIK) had already lost a petition that contested the inclusion of NDTMFBs as digital credit providers. AMIK had argued that such regulations would limit the ability of these institutions to operate freely, including preventing them from accepting cash as collateral or engaging in other activities.
To address concerns raised by AMIK and other stakeholders, the proposed amendments to the Microfinance Act now seek to create a distinct category for NDTMFBs. This would separate them from traditional deposit-taking institutions, allowing them to offer credit against physical assets, including movable or immovable property, as collateral. However, they would still be prohibited from taking cash deposits or cash collateral.
The amendments to both the CBK and Microfinance Acts are part of a broader effort to expand the regulatory powers of the Central Bank to cover more credit providers. These changes are aimed at curbing lending malpractices, including the charging of high-interest rates, unfair credit recovery practices, and the misuse of borrowers’ data. The Central Bank has been pushing for more inclusive regulation, emphasizing that many credit providers, including some digital lenders, are not purely digital.
Kamau Thugge, the Governor of the Central Bank of Kenya, stated in a July interview that the CBK sought to move away from just regulating digital credit providers and toward a broader definition that encompasses all types of credit providers. This would allow the CBK to oversee a more comprehensive range of lending activities.
Non-deposit taking microfinance institutions, which do not hold public deposits, provide credit and other financial services. Examples of such institutions in Kenya include Mwananchi Credit, Ngao Credit, Mogo Finance, and Aspira Kenya.