Desperate times call for desperate measures. This is the condition of things for multifarious digital lending startups which are on the brink of extinction following a new wave of killing regulations that would require them to hold a banking license to survive in Kenya.
In a latest move to beat the regulations, “Branch”, a famous mobile loan app in Kenya has earned regulatory approval to purchase majority ownership stake in a local bank, Century Microfinance Bank Limited.
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Branch International Limited was authorized to purchase 84.89 percent of Century Microfinance Bank Limited’s issued share capital, according to a gazette notice dated Friday, May 7.
“Pursuant to the provisions of section 46 (6) of the Competition Act, 2010, it is notified for general information that in exercise of the powers conferred upon the the Competition Act, the Competition Authority has authorised the proposed transaction as set out,” the gazette notice reads in part.
Here Is What You Need To Know
- One of the conditions for the approval of the purchase is that Branch and Century must both keep the terms negotiated with the borrowers on all loans in their respective loan books at the time of the purchase.
- Branch and Century will both, also, keep their current performing and non-performing loans in compliance with their terms until they expire, so that the terms do not violate the provisions of the Competition Act №12 of 2010.
- The switch is part of Branch’s larger strategy to move into the formal lending market.
- The decision came a month after parliament passed a bill aimed at regulating mobile loan rates and defaulted credit care in order to protect borrowers from abusive lending.
- Century Microfinance Bank is a microfinance institution that specializes in providing financial services to micro, small, and medium enterprises. Branch is one of the most popular apps in Kenya on the Google Play Store.
- In 2012, the Central Bank of Kenya granted Century Microfinance Bank a deposit-taking microfinance institution license to provide a full range of financial services, including savings accounts and credit facilities.
- The Central Bank of Kenya (Amendment) Bill of 2020, although purports to curb the steep digital lending rates that have plunged many borrowers into a debt trap as well as predatory lending, also extends its tentacles, by its operation, to all financial technology services in Kenya.
- In October 2020, more than 337 unregulated digital mobile lenders and micro financiers were also barred from forwarding the names of loan defaulters to Kenya’s credit reference bureaus (CRBs). This followed a statement from the Central Bank of Kenya (CBK) in a circular released in March 2020 that digital and credit only lenders will no longer submit credit information on their borrowers to Credit Reference Bureaus (CRBs).
- In the statement, CBK explained that the withdrawal is in response to numerous public complaints about misuse of the Credit Information Sharing System (CIS) by the lenders and particularly poor response to customer response.
The Implications Of The New Law On Digital Financial Services Startups In Kenya
Licensing of Digital Financial Services Companies/Startups
The first direct implication of the new law on digital financial services startups in Kenya is that the Central Bank of Kenya will now possess recognized power under the law to issue operational licenses to startups desiring to provide services related to a digital financial product, financial product advice, market, administrative or management services or credit under a regulated credit contract in Kenya.
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What this means is that startups that offer digital banking services will now also have to maintain a minimum authorized capital of five billion shillings ($46.4 million), which may be increased by such amount as shall be determined by CBK, unless the contrary is stated by the CBK.
In other words, all the rules regulating commercial banks and other financial institutions will now have to apply to startups offering digital financial services under the law.
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Regulation of Interest Rates Charged Users Of Digital Lending Services
Even though digital lenders in Kenya may still be allowed to lend, the law would, however, see that they do not charge interests on their loans excessively. This is because the CBK could now determine the maximum rate of interest they may charge their customers.
Implied Lifting Of The Ban On Credit Lending Startups
Another implication of the new law would also be to terminate the ban on credit lending startups in Kenya which obtain CBK’s license as regards submitting credit information on their borrowers to Credit Reference Bureaus (CRBs).
Thus, with renewed power to report customers for blacklisting to the country’s central credit information sharing center, it is only safe to say that the risks associated with their business model have become, once again, more manageable.
The latest move to control the activities of digital lenders follows the removal of legal cap on commercial lending rates by the Central Bank of Kenya in March 2020.
The cap, established far back in 2016 and which set interest rates chargeable by banks at 4%, was intended to address the issue of the affordability of credit for small enterprises and working people, as they had complained for years that high interest rates had locked them out of accessing credit.
Its removal in March 2020 has, however, resulted in the proliferation of digital lenders, who seek to take advantage of the business opportunities it offered.
Some of the complaints include that digital lenders do not provide full information to borrowers on pricing, punishment for defaults and recovery of unpaid loans.
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For instance, before now Tala, Branch, which are among top players in the mobile digital lending market in the country, offered interest rates of 152.4 percent and 132 percent per year respectively.
Digital lenders have also been accused of abusing personal information collected from defaulters’ mobile phone contacts list to bombard relatives and friends with messages regarding the default and asking third parties to enforce repayment.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer