P.O.

BOX 16872-00100, Nairobi, Kenya

Our Ref: DLAK/National Assembly

Your Ref: TBA

Mr. Michael Sialai

The Clerk to the National Assembly,
P. O. Box 41842 – 00200 Nairobi, Kenya
Parliament Building, Parliament Road
Nairobi, KENYA

Cc
Hon. Gladys Wanga, MP
Chair of the Finance and National Planning Committee
P. O. Box 41842 – 00200 Nairobi, Kenya
Parliament Building, Parliament Road
Nairobi, KENYA

Attn: Michael Sialai, EBS

Re: The Digital Lenders Association of Kenya (DLAK) submission on the Central Bank of Kenya (CBK) Amendment
Bill 2020 - proposed amendments to bring the Digital Lending industry (DLI) under CBK Regulation

Dear Mr. Sialai,

We refer to the public notice published in the local dailies on Monday, August 3, 2020 inviting stakeholders and the general
public to make submissions on the proposed amendments as envisaged in the CBK Amendment Bill (2020), to have the
Central Bank of Kenya (CBK) regulate the digital lending industry.

DLAK brings together the leading digital-first loan providers to facilitate fair access to capital and the responsible growth of
the digital lending sector in Kenya. Leveraging technology and expanding on last generation microfinance models, the
digital lending industry (DLI) has been able to provide access to capital to individuals and small business entrepreneurs for
key needs and use cases, including growth opportunities and emergencies. The DLAK members are aligned with
governmental and consumer stakeholders seeking to advance financial inclusion and empower small businesses and
individuals in a fair and responsible manner.

Despite the benefits of digital lending, DLAK shares governmental concerns with a range of industry practices that have the
potential to cause harm to Kenyan borrowers, including opaque loan pricing disclosure, problematic debt collection
practices, credit bureau reporting challenges, and the lack of oversight of bad actors. While DLAK is strongly in favor of
constructive engagement with government stakeholders in developing responsible regulation under the purview of the
Central Bank of Kenya (CBK), we caution that hasty and overly onerous and prescriptive regulation would undermine
further financial inclusion efforts and significantly restrict critical access to credit.

Accordingly, DLAK agrees and supports the need for regulation, but offers recommendations to ensure that Kenyan
individuals and micro and small business entrepreneurs (MSMEs) are able to continue to access needed capital in a fair and
safe manner. These recommendations include the regulation of this sector under the more appropriate Microfinance Act
(Act No. 19 of 2006) (the “MF Act”).The MF Act provides a suitable path for the regulation of the digital lending industry
as it applies to similar non-deposit taking microfinance business and also mandates the Cabinet Secretary (in coordination
with the CBK) to make regulations specifically for the non-deposit taking microfinance business, including around business
conduct.

Below, we provide additional information about DLAK and the digital lending industry, share customer feedback that can
help inform policy, and outline a proposed regulatory framework that would safeguard customers and allow technology-
driven digital lending to continue to best serve Kenyans.

As always, we seek your good offices, the Speaker’s, the Finance and National Planning Committee and the plenary of the
national assembly’s indulgence in expounding on this rationale through a virtual presentation and working session, cognizant
of the protocols guiding engagements between the house and stakeholders during the Covid19 pandemic.

Introduction

In recent years, a wave of technology-driven innovation has impacted and improved the ability of millions of formerly un-
and-under-banked Kenyans to access financial services. Expanding on last generation microfinance models, the digital

P.O. BOX 16872-00100, Nairobi, Kenya
lending industry (DLI) has been able to provide access to capital to individuals and small business entrepreneurs for key
needs and use cases, including growth opportunities and emergencies. Much of this innovation is based on the reach and
accessibility of mobile technology combined with advanced data analytics that promotes financial inclusion and choice.

The Digital Lenders Association of Kenya (DLAK) brings together the leading digital-first loan providers and associated
stakeholders to facilitate mutual growth in the digital lending sector in Kenya. Our members are aligned with the
government in leveraging technology to advance financial inclusion and empower small businesses and individuals in a fair
and responsible manner.

To this end, we approved and adopted in 2019 a comprehensive Code of Conduct (Code of Conduct), which covers granular
requirements around the granting and repayment of digital loans, consumer protection, marketing and advertising,
collaboration with stakeholders and regulators, and debt collection – issues which speak directly to the concerns expressed
by various stakeholders properly calling for regulation of the industry by the CBK.

DLAK believes that this Code of Conduct is an essential building block for the framing of a regulatory architecture for the
broader DLI in Kenya, and is adaptable to suit the needs of the market as it evolves. As outlined below, the Code of Conduct
could further serve as the underpinning of a fit-for-purpose regulatory framework.

Digital Lending Customer Feedback

Before delving into policy and regulatory considerations, it is important to highlight customer feedback data regarding the
provision of digital lending services in Kenya. The benefits of technology and mobile-driven financial services are
widespread and indeed underscored by a recent (December 2019) survey of Kenyan customers conducted by DLAK through
the independent firm, GeoPoll. The survey contacted 1,000 individuals who borrowed from a digital lender (including digital
lenders outside of DLAK) in the past 6 months either for personal or business use.

Certain survey responses stand out and highlight both the importance of digital lending in Kenya and the need for thoughtful
application of regulatory frameworks that can mitigate challenges, but not threaten the viability of this critical and
developing area of financial technology and innovation.

Key highlights include:

● 83% of digital lender customers were satisfied or very satisfied with their experience;
● 88% would consider taking another loan from a digital lender;
● 84% of small business borrowers stated that the loan enabled at least some growth in their business, with nearly
30% expecting a 2x return or more;
● Nearly half of the sampled respondents mentioned that they would not have other credit options if not for the
mobile loan; and
● 96% of respondents believe that having more credit options is a good thing.

Analysis of the CBK Amendment Bill 2020 (“the Bill”)

The Bill seeks to amend the CBK Act to empower the CBK “to regulate and supervise the conduct of digital providers of
digital financial products and services, to regulate and supervise the conduct of providers of financial products and to
regulate and supervise the conduct of financial services”.

The Bill further seeks to introduce the following definitions:

● "digital financial product" to mean a digital facility or an arrangement through which, or through the acquisition of
which, a person makes a digital financial investment, manages digital financial risk, or makes a non-cash payment

● "digital financial service" to mean the provision in relation to a digital financial product, financial product advice,
market, administrative or management services or credit under a regulated credit contract
● "financial product" to mean a facility or an arrangement through which, or through the acquisition of which, a
person (a) makes a financial investment; (b) manages financial risk; or (c) makes a non-cash payment

● "financial service" to mean the provision in relation to a financial product— (a) of a credit service (b) financial
product advice, (c) dealing in a financial product (d) market for a financial product; or (e) administration or
management.

The above provisions are ambiguous and likely capture many entities and products already subject to legislation and
regulation, including under the supervision of the CBK.

P.O. BOX 16872-00100, Nairobi, Kenya
The current CBK Act exists to provide for the establishment and operationalization of the CBK as an institution and to
provide for its operation thereof specifically to establish the currency of Kenya and for matters connected therewith and
related thereto.

The draft does not seek to amend or repeal in any way any existing legislation and as such, it is left to uncertain
interpretation as to its applicability in correlation with existing legislation, to wit;

● The banking sector is governed and regulated by the CBK under the existing Banking Act (cap 488 of 2012) and
banking sector charters and the Prudential Guidelines

● The microfinance institutions are governed and regulated by the CBK under the existing and in force Microfinance
Act No. 19 of 2006

● The Credit Reference Bureaus are governed and regulated by the CBK under the new Credit Reference Bureau
Regulations (2020)

● Payment service providers are governed and regulated by the CBK under the National Payment System Act No.
39 of 2011

● SACCOs are governed and regulated by the CBK under the SACCO Societies Act No. 14 of 2008

As industry stakeholders, our submission is that the proposed amendments to regulate the credit only institutions and other
digital financial services providers should be considered and weighed against all existing legislation to mitigate against the
probability of ambiguity, misinterpretation and a duplicity and complexity of laws. Instead, by recognizing the closer nexus
of digital lending to non-deposit taking microfinance lending, amendment to the MF Act would more naturally and properly
create a coherent and simplified regulatory framework. .

Policy Considerations

Notwithstanding the data provided above, DLAK shares governmental, regulator and consumer concerns with a range of
industry practices that have the potential to cause harm to Kenyan borrowers, including opaque loan pricing disclosure,
problematic debt collection practices, related credit bureau reporting challenges and the lack of oversight of bad actors.

Accordingly, while we caution that hasty and overly onerous regulation would undermine further financial inclusion efforts
and significantly restrict critical access to credit, DLAK encourages constructive engagement with the government in
developing responsible regulation, and is aligned in the mission of reigning in rogue players, promoting fair industry
standards, and enhancing the competitive landscape in order to increase customer choice.

To this end, we believe that it is appropriate that the Central Bank of Kenya (CBK) have authority to supervise the digital
lending industry. Pursuant to this, we propose that the Finance & National Planning Committee consider making
amendments to the Microfinance Act (Act No. 19 of 2006) (the “MF Act”) to explicitly bring the DLI under this framework.
The MF Act is the more appropriate vehicle for regulatory oversight given closer parallels between credit-only microfinance
lending and the financial services subject to policy consideration here. Additionally, as noted above, re-opening the CBK
Act for further amendment will likely introduce added complexity, ambiguity, and unintended consequences for a broad
range of other financial services providers and products.

To that end, we propose here ten key tenets or pillars of a proper digital lending regulatory framework under the MF Act, the
details of which are further captured in the attached Appendices:

1. The Central Bank of Kenya (CBK) should be granted supervisory authority over the digital lending industry,
including with respect to AML/KYC compliance.
2. Regulation around business conduct should encourage fairness, transparency, and honesty with respect to
treatment of customers in all facets of lending.
3. Debt collection practices must treat all borrowers fairly, transparently, and with respect.
4. Responsible lenders should be permitted to expand access to capital for individuals and small business
entrepreneurs, and must do so through transparent and fair risk based pricing that forbids hidden and punitive fees
(e.g. limitless accrual of interest on delinquent balances).
5. Credit reporting should include near real-time negative and positive data in order to avoid over-indebtedness and
promote virtuous credit cycles (e.g. an ability to improve credit scores).
6. Customer data should be safeguarded and used only for transparent, proper purposes.
7. Kenya should remain at the leading-edge of digital finance and promoting financial inclusion by fostering the
continued development and adoption of digital and machine learning technologies.
8. As demonstrated through Kenyan customer surveys, digital lending services provide individuals and small
business entrepreneurs with critical access to capital that can help manage household finances and drive business
growth; arbitrarily restricting digital lending will harm Kenyan consumers and the Kenyan economy.

P.O. BOX 16872-00100, Nairobi, Kenya
9. Regulation should be technology-neutral and leverage global standards, best practices, and self-regulatory models
to keep pace with evolving technologies and an evolving industry. To this end, policymakers should consider
adopting global regulatory models whereby the primary regulator, here the CBK, would delegate front-line
licensing and oversight authority to a delegated regulatory body. This approach can help reduce resource
constraints on the CBK and ensure that regulation keeps pace with a fast-evolving industry.
10. The policymaking and rulemaking process should remain open, transparent, and collaborative in order to best
serve the interests of Kenyan society.

Going forward, DLAK will continue its work on helping to inform a regulatory framework that promotes fair and
responsible innovation, while safeguarding Kenya’s consumers and small business entrepreneurs. We
accordingly seek a meeting with yourself and other key stakeholders to further discuss the proposed framework. We look
forward to working constructively with governmental stakeholders and stand ready to do what we can to advance our mutual
interest in furthering a robust, dynamic, and inclusive Kenyan economy.

Further, annexed to this letter is a draft framework to amend the MF Act to reflect the changes proposed in the foregoing.
Through your guidance, we look forward to further detailing these recommendations directly with the committee, the CBK
and other stakeholders to ensure that we have the best-in-class policy, legal and regulatory framework that answers to the
needs of the market and ensures compliance with regulatory requirements.

Sincerely,

___________________________________
Robert Masinde
Chairperson of the Digital Lenders Association of Kenya

P.O. BOX 16872-00100, Nairobi, Kenya

ANNEXURE ONE: DLAK’S PROPOSED REGULATORY FRAMEWORK