Digital lenders have been on the spot since their inception into the banking and finance industry due to indulgence in unscrupulous business practices. Some of the unfair trade practices the Digital lenders are accused of engaging in are predatory lending tactics, exorbitant interest rates, sharing and misuse of customer data in the name of ‘debt shaming’ among others. The above-mentioned misdeeds violate the constitutional rights of the consumers especially the rights under Article 46 on consumer protection and right to privacy under Article 31 of the Constitution of Kenya 2010. Digital lenders have also constantly violated the provisions of the Competition Act, Data Protection Act, and the Consumer Protection Act hence a need to tame their practices and bring sanity into the digital lending space.
The Central Bank of Kenya (Amendment) Act of 2021 assented to on 7th December 2021 is game-changing legislation that will bring the digital lending space under the ambit of Central Bank of Kenya (CBK). Initially, the CBK was only licensing Banks through the Banking Act, Regulations and CBK prudential guidelines. The other Deposit taking financial institutions such as Microfinance Institutions are regulated by CBK through the Microfinance Act while Deposit taking Saccos are regulated by Sacco Societies Regulatory Authority (SASRA) through the Sacco Societies Act. Digital lenders are non-deposit taking financial institutions lending money to clients without taking deposits. Aside from their ugly side, they have the good side which is helping SMEs operate their businesses with ease through expedient and instant loans.
The operational freedom that Digital lenders have enjoyed previously is the cause of major concerns raised necessitating legislation of this new Act. Perhaps the CBK had granted them a test and learn period to wait for the loopholes to manifest themselves before sealing them immediately as they have done. The CBK Amendment Act provides a sound regulatory framework to digital credit providers. The Act gives the CBK powers to make regulations to operationalize the Act, issue licenses to digital lenders, supervise, suspend, and revoke licenses of digital credit providers who do not conform to the operational standards. Among the key operational standards that Act sets are registration requirements, management requirements, credit information sharing, and reporting requirements. With the above new changes, SMEs will operate better with more trust in the sector and protection of their rights hence boosting trade in the country due to increased financial inclusion