May 26, 2022

Digital lenders (DCPs) in Kenya will be required to disclose their funding sources and provide evidence once legislation aimed at regulating the sector comes into force.

The new rules, published Monday by the country’s financial regulator, the Central Bank of Kenya (CBK), also require digital lenders to be licensed by the country’s monetary authority or cease operations by September 2022. Previously, digital lenders were only required to register. Companies will start their activities in the country.

While disclosing the source of the funds, CBK said the goal is to keep lenders from engaging in financial crimes such as money laundering.

“The digital lender must provide the bank (CBK) with the source and sources of funds that are proposed to be invested or invested in the digital lending industry and demonstrate that the funds are not income from delinquency,” the DCP part of the rules says.

Development financial institutions (DFIs), commercial banks, venture capitalists and high net worth individuals are some of the popular sources of funding, especially loans that are used by lenders in the digital space for on-lending.

The new rules came into effect after President Uhuru Kenyatta passed the PPM law in December last year, allowing the bank to issue licenses to digital lenders and “check for fair and non-discriminatory practices.” Restoring order in an area that has been regulated for years.

There are over a hundred loan apps in Kenya, popular for their unsecured and instant loans through mobile phones. While concerns have been raised about how most of them operate, some have been accused of exploitative interest rates and debt recovery tactics. Popular apps include Silicon Valley-backed Tala and Branch and Zenka Finance, owned by Latvian businessman Eger Keisenfelds. Others include Opesa, Okash and Credit Hela, all linked to Chinese billionaire Yahui Zhou.

Under the new law, digital lenders will be required to disclose all loan terms and fees, including interest rates and the total amount to be repaid. They also need to get bank approval before changing their pricing model.

In addition, they are prohibited from sharing customer information with third parties and using threatening language, accessing or contacting their customers’ phone contacts, and using “bad-gathering tactics.”

“The rules are meant to address societal concerns, especially given the recent massive increase in digital lending through mobile phones. These concerns stem from the predatory practices of previously unregulated digital loan providers, and in particular their high fees, unethical collection practices, and misuse of personal information,” CBK said in a statement.

“The rules provide for, among other things, regimes for managing licenses and lending to monetary policy. They also provide the basis for consumer protection, credit information sharing, and DCP’s anti-money laundering and anti-terrorist financing (AML/CFT) obligations.

Digital lenders that violate the new rules, including sharing personal information about loan defaulters with third parties, risk being fined or have their licenses revoked.

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