The digital financial landscape in Kenya has transformed significantly with the rise of Digital Credit Providers (DCPs), creating opportunities for financial inclusion and innovation.
Recognising the need to regulate this sector, the Central Bank of Kenya was authorised to license and supervise DCPs under the Central Bank Act and supplementary Regulations published in March 2022.
These regulations aim to create a secure financial ecosystem that protects consumers while fostering innovation.
However, implementing the licensing process has been challenging, causing delays and frustrations among applicants.
The CBK is mandated to grant a license to a DCP within 60 days of receiving a complete application, provided the applicant meets all requirements.
This 60-day timeframe was designed to encourage the growth of the digital credit market.
Despite receiving over 500 applications since the Regulations were published, the CBK has issued only 58 licenses to date, none within the 60-day period.
The licensing process has been lengthy due to unclear guidelines, making it burdensome for DCPs. Numerous queries and prolonged response times from the CBK have extended the process beyond the intended 60 days, causing uncertainty and operational delays for DCPs.
The lack of detailed guidelines from the CBK on evaluating applications has significantly contributed to delays.
This lack of clarity has left many DCPs uncertain about the criteria and standards they need to meet, resulting in frequent re-submissions and additional queries from the CBK.
This cumbersome and opaque process has led to a severe backlog of applications. With hundreds of applications pending and only 58 licenses issued, the CBK is struggling to manage the volume, further exacerbating delays.
The prolonged and opaque licensing process has adversely impacted DCPs and the broader financial ecosystem in Kenya.
For some DCPs, the delay in obtaining a license has resulted in significant fundraising challenges.
Investors are hesitant to commit funds to DCPs that lack regulatory approval, fearing potential legal and operational risks.
This uncertainty has stymied the growth and expansion plans of many promising digital credit providers.
The extended licensing process has created operational uncertainties for DCPs. Without a clear understanding of the evaluation criteria and timelines, DCPs are unable to effectively plan and execute their business strategies.
This uncertainty undermines their ability to innovate and compete in the rapidly evolving digital financial market.
The delays in licensing also affect consumers who rely on digital credit services for quick and convenient access to funds.
The slower rollout of licensed DCPs limits consumer choices and may push them towards unregulated and potentially exploitative credit providers.
To address these challenges and streamline the licensing process, the regulator should publish comprehensive guidelines detailing the specific requirements and evaluation criteria for DCP applications.
This transparency will help applicants better prepare their submissions, reducing the back-and-forth with the CBK.
The CBK should invest in its capacity to handle the high volume of applications more efficiently.
This could involve hiring additional staff, implementing advanced processing systems, and providing regular training to ensure a consistent and fair evaluation process.
Regular engagement with DCPs and other stakeholders in the digital financial ecosystem can help the CBK gather feedback and continuously improve the licensing process.
Open channels of communication will also foster a collaborative approach to regulation, benefiting both the CBK and the industry.
The CBK must strive to adhere to the 60-day licensing period stipulated in the Regulations by implementing strict internal timelines and monitoring mechanisms.
The CBK should consider applying a sandbox approach to licensing. Under this approach, license applications would be approved within 60 days, but with conditions requiring the DCP to address any pending issues within a prescribed timeframe, such as 12 months.
Failure to address such issues may result in the CBK suspending or revoking the conditional license.
By adopting the sandbox approach, the CBK would also be giving itself time to engage the DCP sector, understand the risk issues, and develop practical and balanced guidelines to assist DCPs in submitting quality applications and maintaining ongoing compliance.
The regulator can also consider sharing the supervisory mandate with other regulatory agencies such as the Competition Authority of Kenya (CAK) and the Office of the Data Protection Commissioner (ODPC).
Most complaints against DCPs relate to consumer protection issues, such as unconscionable debt collection practices, lack of transparency regarding product features such as fees, and violation of data privacy through misuse of contact addresses on mobile devices.
By delegating conduct regulation to the CAK and the ODPC, the CBK can focus on the licensing aspect while ensuring that consumer protection and data privacy issues are adequately addressed.
This collaboration would lead to a more comprehensive regulatory framework, enhancing consumer trust and market stability.
Joseph Githaiga is Partner, Spencer West