Digital lenders dealt a blow as court affirms new CBK regulations

High Court has given Central Bank of Kenya a greenlight to proceed with controlling the interest rates of digital loan platforms after it ruled that the law supporting the regulation of Digital Credit Providers is Constitutional.

In a judgement rendered by Lady Justice Margaret Muigai on behalf of now Court of Appeal Judge George Odunga, the sitting in Machakos declared the Central Bank of Kenya (Amendment) Act of 2021 was lawful.

It dismissed a suit by Association of Micro-Finance Institutions-Kenya for lack of merit, noting that the regulator together with National Treasury Cabinet Secretary Ukur Yatani and Parliament complied with all the law and the Constitution requirements before the enactment of the bill.  “Accordingly, it was upon the petitioner to prove that the law was not followed in the passage of the Amendment and the Regulations. No such evidence was placed before me in this petition, “ the judge stated

The CBK Act 2021 which was assented into law by retired President Uhuru Kenyatta on December 7 last year will see the growing online lending sectors seek approval of the Central Bank for the pricing of their loans bringing them under the same rules as commercial banks. The law comes in the face of growing concerns on the predatory lending of digital lenders where the borrowers do not get full access to information on pricing, punishment for defaults and recovery of unpaid loans.

It now gives CBK powers to expressly bar digital lenders from using threats, violence, “obscene or profane language against customers or their references or contacts for purposes of shaming them” in the course of debt collection.

The law also prohibits digital lenders from accessing a customer’s phone book or contacts list and sending them messages in the event of debt default.

Digital lenders will now set interest rates for their loans within parameters approved by the CBK in an effort to protect borrowers against predatory lending that has thrown many into debt traps.

Sensitive information

They will also not be allowed to post a customer’s personal or sensitive information online or make unsolicited calls or messages to the contacts in their phone books.

According to the regulations, CBK will revoke licences of such digital lenders and their directors fined up to Sh500,000 or jailed for five years or both.

Digital lenders have also been barred from forwarding names of defaulters of up to Sh1,000 to CRBs. The move offers relief to thousands of borrowers whose credit scores have been hurt over loans tapped to meet basic needs such as food and rent.