Navigating Fintech Regulation in Kenya
In many African markets, governments have slowly introduced policies designed to regulate the financial industry and technology sector more broadly. However, fintech companies often fall into a grey area that places them outside the scope of existing regulations. As such, most countries have had to create new or revised laws specifically around fintech innovation. One example of this is recent reforms in Kenya.
In 2020, the Kenyan government introduced the Credit Reference Bureau Regulations (CRB) which was designed to provide a framework to guide the exchange of client information between lenders, including banks, non-banks, and credit information providers (e.g., digital lenders) regulated by the Central Bank of Kenya. Specifically, the Central Bank of Kenya sought to uphold credit information sharing as a tool for reducing information asymmetries around borrower creditworthiness, as well as bolster consumer credit protection.
Some of the key changes that came with this new regulation included:
- A minimum threshold of KES 1000 (~USD 10) for negative credit information: This means that lenders are not allowed to submit negative information to CRBs. Borrowers within the minimum threshold that had been previously penalized are supposed to be delisted.
- Withdrawal of approvals from unregulated lenders: The new regulation prevents unregulated lenders from submitting credit information to CRBs, avoiding credit data misuse and information sharing.
Similarly, the amended Central Bank Act was passed in December 2021 to regulate digital lending. This new regulation essentially gives the Central Bank of Kenya the power to license digital lenders, including previously unregulated providers, in the country, as well as to ensure the existence of fair and non-discriminatory practices in the credit market.
Prior to the passing of this law, digital lenders were at liberty to price loans as they wanted and could punish defaulters by blacklisting them on the CRB for amounts as low as KES 100 (~USD 1). This new law ensures that digital lenders set their loan interest rates within the approved parameters as set by the Central Bank of Kenya. Borrowers in turn are protected against predatory lending that has led to debt traps.
The Effect on Digital Lending Startups
Of course, new regulations always create changes that can affect specific industry players disproportionately. Zenka, a digital lender providing quick, reliable loans, was one such fintech that was heavily affected by this law. With Zenka, borrowers can access loans between USD 5 and USD 300, with flexible repayment within a period of 60 to 180 days.
Following amendments in the CRB regulations, Zenka was among the digital lenders that were barred from submitting borrower reports to the CRB, which affected the repayment of Zenka’s loan portfolio, resulting in an extension in the repayment period until debt collection could resume. This spurred Zenka to design a new credit scoring system that leverages mobile money transactions to gauge borrower creditworthiness, thereby eliminating Zenka’s reliance on CRB data.
Tala, another Kenyan digital lending platform, believes that the new 2021 regulation is favourable for the competitive landscape and in turn, will increase customer choice. From their viewpoint, the CRB data is not highly beneficial to them as they leverage alternative data sources to better understand a borrower’s creditworthiness. Since they have never relied on the CRB database to determine credit risk, they believe the use of a risk-based credit model by other digital lenders powered by machine learning technologies is more suitable.
Final Thoughts
As the fintech world evolves, it is essential to create new laws and modify existing ones to regulate activities and safeguard all parties involved. However, new regulations often require companies to invest substantial resources into restructuring to comply, which is not always a simple process. We have seen that regulation changes can have a major impact on entire product strategies. Ultimately, for a thriving ecosystem to be built, fintechs must form relationships with regulators, and regulators must create better pathways for collaboration when proposing and passing new laws.
About the Authors
Lornah Mutegi is a Senior Associate at Open Capital and Wairimu Muriithi is an Investment Fellow at Capria Ventures. They both are alumni from the first cohort of the VFA Fintech PM Bootcamp.
