Blow to digital lenders as court endorses CBK regulations

The Central Bank of Kenya has been given the nod to go on with its plan to control and regulate digital credit providers in the country.

The High Court dismissed a suit filed by the Association of Microfinance Institutions challenging the Central Bank of Kenya (Amendment) Act, 2021, which led to the introduction of the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022.

The regulations also provide the licensing procedure and compliance requirements for the digital lenders.

The entities targeted by the regulations are those providing credit facilities through online systems such as the internet, mobile and computer devices, and mobile phone applications.

In the lawsuit, the Association of Microfinance Institutions wanted the court to declare the Amendment Act unconstitutional, arguing that its members were on the brink of suffering untold prejudice.

They said they were unfairly and illegally subjected to the regulations, whose net effect was to limit their operations and close down their business.

Formulation of regulations

They also contended that they ought to be regulated under the Micro Finance Act and not the Central Bank of Kenya Act.

It was their argument that the government had violated their rights by halting the process of formulation of regulations under the Micro Finance Act, which was to legitimise their businesses, and start formulation of other regulations under the CBK Act.

But Justice Margaret Muigai, who read the judgment on behalf of Justice George Odunga (now in the Court of Appeal), stated that the CBK together with the National Treasury Cabinet Secretary and Parliament had complied with all the procedures and constitutional requirements before introducing the law amendment.

She said there was no evidence that there was no public participation in the enactment of the disputed law and that the rights of the members of the association were not violated.

In addition, the regulations did not violate their right to fair administrative action protected under Article 47 of the Constitution.

“Accordingly, it was upon the petitioner to prove that the law was not followed in the passage of the amendment and the regulations. No such evidence was placed before me in this petition,” the judge stated.

Also read:10 digital loan firms given licences as 278 others wait

She said the association was aware of the process of enacting the law and that the comments of the Digital Lenders Association, which the regulations target, were collected.

In regard to a claim that digital lenders had been discriminated against through introduction of the regulations, the court said other entities dealing with financial credit are regulated too.

For instance, she said, banks are regulated under the Banking Act and micro-finance banks are regulated under the Micro Finance Act, 2006.

“The enactment of the Central Bank of Kenya (Amendment) Act, 2021, which led to the introduction of the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022, cannot amount to infringement of the constitutional rights of the petitioners. To the contrary, and as admitted by the petitioner, regulations are necessary to superintend, the manner in which the petitioner’s members conduct their business in the interest of the public that relies on such services,” the court said.

The CBK (Amendment) Act 2021, which was assented to by former President Uhuru Kenyatta on December 7 last year, aims to see the growing online lending sector seek the approval of the Central Bank for the pricing of their loans, bringing them under the same rules as commercial banks.

The law came in the face of growing concerns about the predatory lending of the firms, with the borrowers not getting full access to information on pricing, punishment for defaults, and recovery of unpaid loans.

The law gives CBK powers to expressly bar digital lenders from using threats, violence, “obscene or profane language against customers or their references or contacts for purposes of shaming them” in the course of debt collection.

In addition, the law prohibits digital lenders from accessing a customer’s phone book or contacts list and sending them messages in the event of debt default.

While urging the court to dismiss the petition, CBK argued that the number of borrowers tapping the digital loans from the unregulated lenders grew to more than two million two years ago from an estimated 200,000 in 2016, highlighting their popularity.

Online lenders

The proliferation of the online lenders has, however, saddled borrowers with high interest rates that rise up to 520 per cent per year, leading to mounting defaults and an ever-growing number of defaulters.

The judge concurred with the CBK and National Assembly submissions that the petitioner did not demonstrate how the regulations formulated contravene their rights.

The decision of the court came days after the implementation of the Bill took effect on September 17, 2022, with the CBK announcing that only 10 out of 288 digital credit providers who had applied had been fully licensed.

The approval is in line with the law which requires all operating unregulated DCPs to apply for a licence within six months of the publication, CBK boss Patrick Njoroge said.

Several unlicensed online lenders have been suspended from operating until they comply with the law.

The 10 licensed digital lenders include Ceres Tech Limited, Getcash Capital Limited, Glando Africa Limited (Trading as Flash Credit Africa), Jijenge Credit Limited, and Kweli Smart Solutions Limited.

The others are Mwanzo Credit Limited, MyWagepay Limited, Rewot Ciro Limited, Sevi Innovation Limited, and Sokhela Limited.

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