Initially, the digital lending market composed unregulated entities which took advantage of poor borrowers from law income groups. Digital lenders were left to determine their own interest rates and in cases of default by the borrowers, lenders would impose late payment fees in excess of in duplum rule. Furthermore, most digital lenders used unorthodox means of debt collection such as threats, debt shaming, incessant messages and calls to their customers. 

The legislatures recognized that the digital lending market, if left untrammeled, would run amok to the detriment of the consumers. Consequently, the Central Bank of Kenya (Amendment) Act, 2021 was assented into law. Subsequently, the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 came into force.  The aim of the amendment was to regulate and bring the digital credit lending space under the control of the Central Bank of Kenya. It also mandated Central Bank of Kenya to license digital lenders. 

The Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 (the “DCP Regulations, 2022”) defines a digital credit business as a business of providing credit facilities or loan services through a digital channel. A digital channel in this case applies to internet, mobile devices, computer devices, applications and any other digital systems. 

Notably, the DCP Regulations, 2022 not only applies to fully digital lenders, hybrid digital lenders who use digital channels at any point in their credit administration and management processes are classified as a digital credit business. In addition, unlike deposit taking micro-finance institutions, DCP Regulations, 2022 bars digital credit businesses from taking deposits or cash collateral from an individual or entity before advancing any credit facility to them. 

Under the Regulations, digital credit providers are prohibited, in their recovery efforts, from using threats, violence, or other means to harm borrowers, their reputation or property and are mandated to comply with the in duplum rule. Furthermore, they are required to put in place appropriate policies, procedures and systems to ensure confidentiality of customer information and transactions; digital lenders must comply with the principles of data protection under the Data Protection Act, 2019. 

Despite the enactment of the new laws, there are a number of digital credit providers operating without a valid license from Central Bank of Kenya. Section 33(S)(1) of the Central Bank of Kenya Act, Cap 491 provides that a person shall not carry on any digital credit business unless that person has been licensed by the Bank under the Act or is permitted to do so under any other written law. Further, operating without a valid license is considered an offence and any person who contravenes the same shall be liable upon conviction to imprisonment for a term not exceeding three (3) years or to a fine not exceeding five (5) million shillings or to both. Additionally, unlicensed digital credit providers may face increased scrutiny and regulatory sanctions, impacting their ability to operate freely in the digital credit market. 

In conclusion, regulatory compliance is crucial to safeguard consumers, maintain the integrity of the financial system and uphold data protection and privacy standards.