Digital lending is the act of offering a loan to individuals using online technology without the use of physical intermediation in order to deliver faster and effective outcomes. This new trend of procuring financial facilities is the new craze in Kenya today.

Over the past 10 years mobile-based lending has grown in Kenya. Some estimates put the number of mobile lending platforms at 49. The industry is largely unregulated but includes major financial players. Banks such as Kenya Commercial Bank, Commercial Bank of Africa, Equity Bank and Coop Bank offer instant mobile loans. These lending services have been made possible by the ballooning financial technology (fintech) industry.

Who Borrows and Why?
Digital loan services seek to bridge the gap for Kenyans, primarily the poor, women and youth who do not have formal bank accounts, or whose incomes are not stable enough to borrow from formal financial institutions. The reasons fronted behind obtaining digital credit by this target clientele are mostly for domestic use and consumption in household and personal needs, emergencies such as medical and funeral expenses as well as educational needs. These services have improved access to loans but there are questions about whether the poor are being abused in the process.
What are the Business Models of Digital Lending?

  1. Pioneer business model: where the mobile network operators (MNO) partner with banks or other financial institutions. In such cases the MNOs are the channel of disbursing the loans while the financial institutions operate the borrowers’ accounts and offer the funds and they bear the default risk for the loans. Examples of this is the partnership between Safaricom M-Pesa and Commercial Bank of Africa (CBA) to issue the MShwari product.
  2. Reliance on applications to issue digital credit: This is where the companies offer loans from their existing funds without entering into any agreements with a financial institution. The borrowers are required to install an app on their mobile phones which collects data on the borrower’s mobile money usage as well as social media usage. It is through reliance on this data that the lenders assess and make decisions on whether the borrowers are creditworthy. Such lenders in Kenya include Brach, Saida and Tala loan facilities.
  3. Banks that offer digital lending services: This is where the banks develop their own digital infrastructure and therefore there do not partner with mobile network operators. An example is Equity Bank, through the Equittel product.
  4. Peer to peer lending (P2P): This model is a form of direct lending of money to customers without the participation of financial institutions. P2P lenders provide the digital platform that links the customers to the lenders and they do not normally lend their own money as their role is limited to facilitating the lending process. In Kenya such companies include UbaPesa and Pezesha Loans.

Kenya is among the first countries where digital lending, mostly using a mobile phone, has gone mainstream. The pioneering lenders came under the spotlight following complaints of exorbitant interest rates and bad collection methods from mainstream financial providers/lenders. With dozens of apps offering short-term advances similar to payday loans, people who once borrowed mainly from family and friends are now being bombarded with ads for quick money and calls from debt collectors.

What is the Legal Framework of Digital Lending in Kenya?

The digital lending sector in Kenya occupies a unique position in as far as its regulatory framework is concerned. Currently, there is no legal framework governing digital borrowing platforms in Kenya, which has resulted in digital and mobile lenders operating freely and digital borrowing platforms that are not classified as financial institutions under the Banking Act or the Microfinance Act operating without regulatory oversight.

The Central Bank of Kenya is the primary regulator in the financial sector and is charged with the development of financial policies that encourage growth in the Kenyan economy. Section 4 (1) of the Central Banks Act specifically states, “The principal object of the Bank shall be to formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices”.This indicates that at its core, all financial regulatory activities in the country are set on the policies formulated by the Central Bank of Kenya (CBK). Section 34(2) of the Central Bank Act provides that CBK may provide any services to any institution that it considers desirable, and the article further specifically lists the institutions to include Banks, Microfinance institutions and financial institutions any other person or body of persons which the Minister, on the recommendation of the Bank may by notice in the Gazette prescribe as indicated in section 2(b) of the Banking Act.

The Central Bank of Kenya (Amendment) Bill, 2020 was published on 19 June 2020 (the Bill), with the principal objective of amending the Central Bank of Kenya Act (the CBK Act) to allow the Central Bank of Kenya (the CBK) to supervise and regulate digital financial products and services.
This has led to multiple micro-lenders investing in Kenya’s credit market in response to the growth in demand for quick loans. Claims of excessive interest rates and allegations that many of these lenders fail to provide full information to borrowers on pricing terms and consequences of defaults have led to concerns that the digital lending market needs regulation. The Bill proposes that the CBK act as the regulator of digital financial products and services in Kenya, so as to ensure a fair and non-discriminatory marketplace for access to credit.
Proposed Amendments to the CBA Act

  • Mandatory licensing of digital money lenders

The Bill requires every person intending to undertake the business of a digital money lender to first obtain a licence from the Central Bank of Kenya (CBK). A digital money lender is defined in the Bill as an entity that offers credit facilities in the form of mobile money lending applications. An applicant must meet certain requirements, including incorporation as a company and minimum capital to be prescribed by CBK. An applicant will also be required to provide to CBK the agreement it has with the telecommunication services provider on whose platform the applicant intends to provide the digital lending services together with the proposed terms of use of the digital lending service to be given to its customers. The Bill also requires CBK to publish a list of all licenced digital money lenders in the Kenya Gazette.

  • Management of digital money lending institutions

The Bill requires every licenced digital money lender to have at least two directors and where the lender is foreign owned, one of the directors must be a Kenyan citizen.

  • Declaration of Interest rates

Every licenced digital money lender will be required to expressly announce its interest rates when advertising its services.


Under the Bill, CBK would have the mandate to regulate and supervise:

  1. the conduct of providers of digital financial products and services;
  2. the conduct of digital credit providers and digital credit service providers;
  3. the conduct of providers of financial products and services; and
  4. the conduct of financial services.

Advantages of Digital Lending

  1. Digital credit can help small enterprises to scale and to manage their daily cash flow as well as allow people to start new businesses to better their lives.
  2. Digital credit has made the banking sector more competitive and this has brought down interest rates charged by banks to the benefit of other consumers.

Disadvantages of Digital Lending

  1. Digital credit policies infringe on an individual’s right to privacy and data protection. Digital lenders require to access private information to assess your credibility for the facility being sought. However, the means by which this information is obtained is questionable and further, the means by which these lenders use this information for debt collection strategies can be termed as abusive and may result in unacceptable levels of debt stress on the individuals seeking digital credit.
  2. Digital lending facilities offer easy access to the facility, however the interest rates in this products are exorbitant with short payback periods which individuals find difficult to payback, plunging themselves deeper into debt and perpetuating the loan culture and accumulation of bad debt. Further, the information on the repayment amount, interest rates (which are more often than not exorbitant and well above the CBK capped minimum lending rate), penalties for late payment and default and other terms are not disclosed clearly and transparently at the beginning (if ever).
  3. Having fallen short in paying back the loan, the individual is listed on the Credit Reference Bureau (CRB). This in turn affects an individual from accessing another loan facility. Being listed with the CRB can also affect a person when it comes to seeking employment as numerous employers now require a CRB clearance Certificate as part of their mandatory requirements for the preliminary shortlisting stage.
  4. As mentioned above, there is currently no regulation under the statues in place in the country that should regulate and monitor this field of financial services. The Banking Act, the Microfinance Act and the Central Bank of Kenya Act all do not define nor provide for digital credit providers or the regulation of such lending services. Bringing digital credit providers under the same regulatory framework will promote greater harmonization of practices, transparency of pricing and interest rates and promote data reporting.
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