Kenyan regulator helps banks recapture digital lending market

The number of Kenyan banks issuing micro loans over smartphones doubled this year after the Central Bank of Kenya imposed regulations on digital lending locking out hundreds of informal sector players.

The latest banking sector innovation survey by the Central Bank of Kenya (CBK) reveals that 74 percent of commercial banks in the country have now digitised their lending services, up from only 44 percent in 2022.

Kenya’s regulator ordered informal lenders to seek licenses in March 2022 where it received over 400 applications from several players. CBK initially granted approvals to only 51 firms and took almost a year to approve only 19 more.

During this time, a majority of Kenya’s 37 regulated banks have now turned to smartphone applications and mobile banking systems for lending to their customers reclaiming the market that was traditionally preserved for them that had been threatened by the rise of digital lenders.

“To position the banking sector to effectively play its role in Kenya's socioeconomic transformation, three recent key reforms have been implemented. First, licensing and oversight of Digital Credit Providers to address inherent challenges including high cost of credit, unethical debt collection, inadequate disclosure and lack of transparency, breach of data privacy, and abuse of personal information. As at the end of March 2024, 51 Digital Credit Providers had been licensed,” Kenya Cabinet Secretary Prof Njuguna Ndungu said during the budget speech.

The Digital Financial Services Association of Kenya (DFSAK) Chair Kevin Mutiso said the regulation has stabilized the industry attracting bankers given the good returns.

“Regulation was a good thing, it has stabilized the market, they used to wake up and change things but now things are clear, and the returns are evident as you see bankers interest,” Mr Mutiso said.

“The bankers have not taken away the market, what we see is those that have licenses are getting good growth, and the market is generally getting bigger,” he said.

Promise to clear pending applications

DFSAK says while CBK has received 480 applications for digital lending licenses since March 2022 but has so far cleared 51, keeping 429 waiting over what it terms as "pending documentation.

Digital lenders have been seeking CBK guidance on the documents required in unlocking more than 400 applications awaiting clearance for award of licences.

Mr Mutiso says the regulator has now engaged them and has promised to clear pending applications over the next six months.

Gatekeeper

Kenya’s small informal players accuse the regulator of chocking innovation with bureaucracy and regulations and playing gate keeper for big corporates. Legislators are pushing to give CBK even more power on Buy Now Pay Later platforms, a nascent $1.05 billion market that is largely informal dominated by asset finance

companies, off grid power solutions, telcos and international payment platforms but is now attracting regulated bankers.

Kenyan MPs have drafted amendments to the Movable Property Security Rights Act which will BNPL covered under hire purchase agreements even as the Hire Purchase Act is set to be repealed.

Ken Gichinga, Chief Economist at Mentoria Economics says there are   players to count in this market and stretching CBK mandate to oversight them would not be practical and only serve to gate keep and lock out players.

“This is just like the digital, they were eating market share very fast and with the licensing the locked most of the big guys out,” Mr Gichinga said.

Otiato Guguyu

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