27 July 2022 by and

Reprieve for non-deposit-taking microfinance businesses as the high court temporarily exempts them from the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022

On 7 December 2021, the President signed into law the Central Bank of Kenya (Amendment) Act of 2021 (Act) that grants the Central Bank of Kenya (CBK) powers to regulate digital credit providers.

Section 57 and section 59 of the Act empower the CBK to enact regulations under the Act within three months of it coming into force. To meet the statutory timeline, the CBK gazetted the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 (Regulations) on 18 March 2022.

Section 59 (2) of the Act requires all existing digital credit providers not regulated under any law to apply for a licence within six months of the publication of the Regulations. In this respect, the CBK required all digital credit providers and non-deposit-taking microfinance institutions to apply for a licence no later than 17 September 2022.  

However, on 7 July 2022, the Association of Microfinance Institutions – Kenya (Association) filed a Petition in the High Court at Machakos, seeking a declaration that the Regulations are:

  • unconstitutional for lack of public participation;
  • discriminatory; and
  • violate the right to fair administrative action.

With respect to public participation, the Association argued that the CBK had failed to ensure that the process of enacting the Regulations was transparent, inclusive and accountable.

With respect to the allegation of discrimination, the Association argued that while institutions already licensed under the Banking Act, the Microfinance Act, and the Sacco Societies Act are exempted from the application of the Act and the Regulations, non-deposit taking microfinance businesses are not, meaning that they are regulated both under the Act and the Regulations, as well as under the Microfinance Act.

With respect to fair administrative action, the Association claimed that, although the Cabinet Secretary in the Ministry of National Treasury and Planning is mandated to enact regulations to regulate non–deposit taking businesses by section 3 of the Microfinance Act, this is yet to be done. Resultantly, these businesses are being compelled to comply with the Regulations, but they are not appropriate for their businesses. During the hearing of the petition, CBK will have an opportunity to respond to these claims before the High Court makes a final determination on each allegation and the entire petition.

Accompanying the petition was an application seeking conservatory orders to stay the implementation of the Regulations in so far as they are meant to apply to non-deposit-taking microfinance institutions.

On 13 July 2022, the court allowed the application, granting interim relief to these institutions pending the hearing and determination of the petition. This means that while digital credit providers must comply with the 17 September 2022 deadline, this requirement does not apply to non-deposit-taking microfinance institutions until the court determines the petition.

If, during the hearing of the petition, the petitioners satisfy the court that the Regulations are unconstitutional for lack of public publication or discrimination, the Regulations will be null and void at that point and will not apply to anyone going forward, including the digital credit providers. Equally, any licences issued under these Regulations will also be null and void, and the CBK will have to comply with the Constitution in enacting fresh regulations, in accordance with the requirements for public participation.

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