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KENYA: DCP REGULATIONS TO APPLY TO NON-DEPOSIT-TAKING MICROFINANCE INSTITUTIONS

By Dominic Indokhomi,Cynthia Amutete Wednesday, October 26, 2022
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The High Court has held that non-deposit-taking microfinance institutions are digital credit providers (DCPs) and are therefore subject to oversight by the Central Bank of Kenya (CBK).

DCPs are regulated by the Central Bank of Kenya under the Central Bank of Kenya Act (Chapter 491) and the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 (the DCP Regulations). Please see our article here for an overview of the DCP Regulations.

In the High Court Petition, Association of Micro-Finance Institutions Kenya (AMFIK) vs The Central Bank of Kenya & 3 others (Constitutional Petition E008 of 2022) [2022] KEHC 13053 (KLR), AMFIK sought exemption of non-deposit taking microfinance institutions from the DCP Regulations. The High Court dismissed the petition after having considered at great length and rejected the grounds raised by AMFIK, which grounds included:

  • the DCP Regulations would be discriminatory against non-deposit-taking microfinance institutions as other financial institutions such as banks, deposit taking microfinance institutions, SACCOs have been exempted from the DCP Regulations;
  • non-deposit-taking microfinance institutions are to be regulated under the Microfinance Act, 2006 and should not be subject to DCP Regulations;
  • the DCP Regulations would cause restrictions on the activities of non-deposit-taking microfinance institutions such as restricting them from taking cash collateral and/or engaging in other activities such as business management services; and
  • AMFIK had not been afforded an opportunity to participate in the stakeholder engagement with respect to the enactment of DCP Regulation.

The Court held that the DCP Regulations were not unconstitutional and reiterated the CBK’s position that the DCP Regulations apply to all unregulated DCPs including non-deposit-taking microfinance institutions. The Court made this finding despite AMFIK’s argument that their services are not offered solely on digital platforms like other DCPs hence they should not be regulated as DCPs.

The judgement reinforces the legality of the DCP Regulations. It also clarifies that credit-only institutions who run digital platforms as one of the ways of delivering their services are regulated as DCPs; notwithstanding that they may offer other financial services to their customers that expose them to human interactions with their customers. Credit-only lenders should therefore review the impact of the DCP Regulations to their businesses and, if applicable, take steps to comply with the Regulations.