Lending in Kenya is largely regulated by the Central Bank of Kenya (CBK) as one of its core functions of maintaining financial stability. In the recent past, lending was a preserve of commercial banks who operated in a rather free market basis as regards charging of interest rates. Over time, the lack of regulation led to serious concerns of high credit cost and credit inaccessibility to SMEs and the unbanked population. In August 2016, the Banking Act was amended to introduce a cap on interest rates by setting bounds on lending and deposit rates by banks to a ceiling of at most 4% above CBK base rate. As a result, the interest rate for commercial bank loans and advances fell from 17.66% in August 2016 to an average of 13.7%. The essence of lowering interest rate was to making borrowing more affordable and lowering the debt burden for borrowers, leading to more borrowing and general growth in business.
Effect of the Cap in Interest Rate on Lending
The International Monetary Fund (IMF) have reported that the interest cap had the opposite effect of what was intended. Specifically, that it has led to the collapse of credit to SMEs; shrinking of the loan book; and reduced financial intermediation. This is because financial institutions were shy of lending to SME’s and individuals and they have a higher risk profile and rather preferred to lending to government who have a low risk (if not negligible) profile and a decent return on investment. The CBK echoed the IMF report through a recent draft paper reviewing the effect of interest rate capping on the Kenyan economy.
As a consequence of constrained access to credit for borrowers, coupled with other external factors, mobile lending platforms remained as the only alternative to credit for households and SMEs. The attraction with mobile money has been due to the fact that lenders require no collateral, they the conduct a minimal credit-risk assessment for borrowers, loans are processed quickly and further that loans are simply accessible to anyone with a mobile phone.
Mobile Lending in Kenya
There are currently about 49 mobile lending applications in Kenya. They operate in a regulatory lacuna with no bespoke legislation. Due to their unique nature, they are often exempt from classification as financial institutions under the Banking Act and Microfinance Act, allowing them to side-step supervision and regulation by the CBK. In turn, they have operated in a rather free market economy with the freedom to set own operational procedures.
A recent survey revealed that over 19 million Kenyans are active mobile loan borrowers. The survey also indicated that more than 380,000 Kenyans have so far defaulted on loans taken from mobile money lenders. Information from Credit Reference Bureaus (CRBs) show that the bulk of bad loans are mobile loans. This coupled with the general outcry that mobile lending terms are exorbitant in terms of the interest rates as well as their onerous repayment terms, has triggered the need for regulation of this market segment.
Regulating Mobile Lending in Kenya
The government in its need to regulate the sector, in 2018, sponsored a Financial Conducts Management Bill proposing the licensing and regulation of digital lenders including setting interest caps by the Financial Markets Conduct Authority (FMCA), the essence being to regulate entities that neither fall under Banking Act nor Microfinance Act. The Bill is still pending in Parliament.
In the same year 2018, the CBK came up with a proposed Banking Charter seeking to offer a form of regulation to mobile lenders. The Charter seeks to provide a disciplined environment through, among others, imposing market driven interest rates. The proposed regulatory measures include requirements for lenders to first text borrowers the terms of a mobile loan before approval; requirements for lenders to implement risk-based credit scoring techniques in loan screening processes, requirements for lenders to publish key information on their websites that include terms and conditions of the loan products; requirements for lenders to acknowledge customer complaints within 48 hours and their resolution in 7 working days; and that institutions submit a quarterly report on the progress of its implementation of the Charter within 10 days after the end of every calendar quarter.
While the objectives of the Charter in regulating mobile lenders may be appreciated, it may not actualize as the CBK does not have the mandate to regulate non-financial institutions. This is purely because mobile lenders may neither be defined as banks nor microfinance institutions under the definitions of the Banking Act, the Microfinance Act and the Central Bank of Kenya Act. As such, they are in turn not regulated by the CBK. Regulation of mobile lenders by the CBK would first require a change in the law. The effect is that the Banking Charter as proposed by the CBK, is not enforceable against mobile lenders. It is inevitable that the Charter will be challenged in court by mobile lenders on the grounds of lack of jurisdiction by the CBK in regulating them.
Mobile lenders can however be deemed to be in the business of offering financial products. Effectively then, the approach towards their regulation should be in the form of amending the Microfinance Act and/or the CBK Act, to give the CBK or other entity authority over companies offering financial products.
In the interim, prior to creation of the law to regulate mobile lenders, the government may need to adopt a principle-based approach as is the case with most developed jurisdictions. The creation of regulatory sandboxes may be a good option for government an attempt to create a framework for regulating mobile lenders. The effect would be to have mobile lenders in a fairly limited regulatory environment so as to identify gaps that may require legislation.
 IMF Working Paper No. 19/119; Do Interest Rate Controls Work? Evidence from Kenya
 CBK Draft for Comments; The Impact of Interest Rate capping on the Kenyan Economy: Highlights
 A ‘regulatory sandbox’ is a safe supervised environment created by the regulator and allowing innovative businesses to test the new products and solutions prior to their full implementation. This approach has already been applied by regulators in Australia, Hong Kong, Malaysia, Singapore, the UK – see Herbert Smith Freehills, ‘Hong Kong Launches Regulatory Sandbox in Wake of Developments in Australia, Malaysia, Singapore, and the UK’ <http://sites.herbertsmithfreehills.vuturevx.com/103/12430/landing-pages/...