HOW TO SET UP DIGITAL LENDING BUSINESS IN KENYA

INTRODUCTION

Digital lending in Kenya is not only growing but also becoming highly regulated as the Kenyan Government is taking a very strong stance on regulatory compliance and consumer protection matters. Not only are money lenders now required to be registered and licensed (which is a new development), they are also subject to stringent operational conditions and required to shun predatory practices, money laundering, misuse of customer data, unconscionable interest rates and other bad practices.

One of our lawyers was in Kenya to study the regulatory requirements, costs, procedures and timelines for incorporation and licensing of a digital lending business in Kenya and Rwanda.

Below is a simplified write up on how to set up a digital lending business in Kenya:

WHO IS A DIGITAL LENDER IN KENYA?

A Digital Credit Provider (“DCP”) in Kenya is a person or organization licensed by the Central Bank of Kenya (“CBK”) to provide credit facilities or loan services through digital channels like the internet, mobile devices, computer devices, applications or any other digital system as may be prescribed by the CBK.

Prior to the year 2022, DCPs in Kenya were unregulated. However, on the 18th of April 2022, the Governor of the CBK issued a six months’ notice for DCPs that were unregulated to apply to CBK on or before September 2022 for licences or cease operations.

By the Central Bank of Kenya (Digital Credit Providers) Regulation 2022 (“Regulation”), any company seeking to establish a digital credit or money lending business in Kenya must obtain a DCP licence from the CBK. It is an offence to carry on the business of digital credit without obtaining the DCP licence and anyone found guilty shall be liable upon conviction to a fine of Ksh 500,000 (approximately $4,200) or imprisonment for a term of five years or to both.

Under the Regulation, the following entities are exempted from obtaining a DCP licence:

1. Institution licensed under the Banking Act of Kenya;
2. An institution licensed under the Microfinance Act of Kenya;
3. A Sacco Society licensed under the Sacco Societies Act;
4. The Kenya Post Office Savings Bank supervised under the Kenya Post Office Savings Bank Act;
5. Credit arrangements involving the provision of credit by a person that is merely incidental to the sale of goods or provision of services by the person;
6. Any other entity approved by the CBK.

ALSO: you may read about How to Set Up a Money Lending Company in GHANA or NIGERIA

CAN DIGITAL CREDIT PROVIDER TAKE DEPOSITS?

No. A DCP is prohibited from collecting deposits in any form in the course of carrying out digital lending business in Kenya.

WHAT IS THE SHARE CAPITAL REQUIREMENT FOR A DIGITAL CREDIT PROVIDER COMPANY IN KENYA?

There is no provision for minimum share capital in setting up a company in Kenya However, we will suggest a share capital of Ksh 10,000,000 when setting up a digital credit provider company in Kenya.

WHAT ARE THE STEP BY STEP PROCEDURES FOR LICENSING A DIGITAL CREDIT PROVIDER COMPANY IN KENYA?

The process for obtaining DCP licence is in three stages and they are:

Approval of Name Stage

• The promoters of a proposed DCP will reserve a name of their choice with the Registrar of Companies in Kenya.

• Submit the reserved names to CBK for approval, in order of preference attaching the following documents:
• Evidence of name reservation obtained from Registrar of Companies;
• Names and addresses of the proposed shareholders, including a copy of requisite identification documents;
• A brief proposal of not more than five pages detailing the:
  • nature and model of business, including the delivery channels intended to be used and platforms to be deployed by the applicant for the DCP licence;
  • the target market, and how the applicant intends to fill the gap created in the market,
  • brief background of the shareholders’ business or economic activities.
• The initial capital that the shareholders intend to inject in the proposed DCP business and provide documentary evidence of the sources of funds, and
• A declaration by the individual shareholders on the sources of their funds. Please note that the declaration should be certified by an Advocate or a Commissioner of Oaths.

• An approval will be issued by the CBK to the Applicant to proceed to incorporate a limited liability company with the Registrar of Companies.

Application for Licence Stage

1. Applicant will proceed to complete an online licence application form in Form CBK DCP 1, print and sign the form.
2. Complete, download and execute Forms CBK DCP 2 and Form CBK 3 for directors, chief executive officer, senior officers and significant shareholders of the company.
3. Scan and upload all completed application forms and fit and proper forms on the portal, together with the following supporting documents:
4. Certified copy of the Incorporation documents of the applicant.
   • Certified copy of the constitutive documents of an unincorporated body that has a significant shareholding in the applicant’s company.
   • Description of the information and communication technology system to be used in the applicant’s operations and an independent assurance on the systems.
   • Description of, and terms and conditions of, credit products and services which the applicant intends to provide.
   • Agreement with a telecommunication or other service provider for provision of channel or platform for the provision of digital credit.
   • The applicant’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) policies and procedures.
   • The applicant’s data protection policies and procedures.
   • The applicant’s consumer redress mechanisms, policies, and procedures.
   • Credit policy, code of ethics and market conduct.
   • The applicant’s pricing model and parameters.
   • Corporate governance policy.
   • Certificate of good conduct, tax compliance certificate and a recent (i.e. not more than three months since issuance) credit reference bureau report for each of the digital credit provider’s individual significant shareholders, directors and senior officers from a licensed credit reference bureau.

Please note that, for individual natural persons, the following additional documents will be required:

• Curriculum Vitae and certified copies of academic and professional certificates.
• Certified copies of National Identity Card and Personal Identification Number (“PIN”) certificate.
• Total number and the percentage of shares to be acquired and evidence of the consideration given or to be given for the same.
• For shareholders, a declaration witnessed by an advocate or a Commissioner of Oaths indicating that none of the funds the shareholder seeks to invest is proceed of crime in accordance with Section 4.6 (a) of the Application Form 
• An affidavit that none of the proposed directors or significant shareholders holds or owns a similar position in any other Digital Credit Provider in Kenya licensed under the Digital Credit Providers Act, 2021.

Please note also that corporate entities are required to furnish the following additional documents:

• Certified copies of the organization’s personal identification number (“PIN”) certificate.
• Resolution of the Board of Directors authorizing the investment.
• Where the entity is regulated, the name and full contact details of the Regulator; Letter of No Objection from the Regulator and a certified copy of license to operate.
• For entities that are already carrying on business other than that of a Digital Credit Provider, audited financial statements for at least the last one year or since inception, especially where the business has been carried on for less than one year.
• Total number and the percentage shares to be acquired and the consideration for the same.
• Ultimate beneficiaries of shares to be acquired.

5.   The copies of the documents shall be submitted to CBK together with evidence of payment of application fee payable by bankers cheque in favour of the CBK or Real Time Gross System (“RTGS”) or other mode of payment as may be specified by the CBK.

6.   CBK will then assess the documents submitted for completeness and compliance with the DCP regulation.

Stage 3: Data Submission Testing and Licencing

7.         Once CBK is satisfied with the applicant’s application, the applicant will be required to test their ‘data submission’ capability (Regulatory reporting) using Application Programming Interfaces (APIs) with guidance from CBK.

8.         Applicant will be directed to pay the prescribed licence fees.

Please note that the prescribed annual licence fees are payable in full for the year during which the licence is initially issued and shall not be prorated for validity periods less than 12 months.

9.         Upon fulfilment of all the licencing requirements and successful data submission testing, the CBK will proceed to issue a DCP licence to the Applicant.

10.      CBK shall cause the name of the licensed DCP to be published in the Kenya Gazette and in the Bank’s website.

WHAT ARE THE APPLICABLE FEES FOR OBTAINING A DCP LICENCE IN KENYA?

The applicable fees for incorporation and processing a DCP licence are as follows:

WHAT IS THE TIMELINE FOR OBTAINING A DCP LICENCE IN KENYA?

The estimated timeline for obtaining a DCP Licence in Kenya in between 4 – 6 months.

ALSO: you may read about How to Set Up a Money Lending Company in GHANA or NIGERIA

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About KORIAT & CO.

We are a commercial law firm in Lagos and Abuja with network of lawyers and consultants across Africa. The above article is not legal advice and does not automatically make our readers our clients unless they specifically instruct us to act or represent them in any way.

Please contact Koriat & Co. through admin@koriatlaw.com or 09067842241 if you require additional information about or assistance in making the application for a money lender’s licence.