Fintech Regulation in Kenya and Africa: A Look at the Current Landscape

Fintech is the use of technology to improve and automate financial services. It has the potential to revolutionize the financial sector, providing new and innovative products and services to consumers and businesses. However, fintech also raises a number of regulatory challenges.

Fintech has been one of the fastest-growing sectors in Africa, with Kenya being one of the leading countries in the region. The rise of fintech has been pushed by the need to provide financial services to the unbanked and underbanked populations a challenge in developing countries such as Kenya.Examples of Kenya based fintech companies include:

• Digiduka

• Pezesha

• Turaco

• Eastpesa etc.

In Kenya and Africa, fintech regulation is still in its preliminary stages. There is yet no single, overarching regulatory framework for fintech. Instead, regulation is fragmented across different sectors and jurisdictions. This for fintech causes a lot of difficulty for fintech companies to operate and comply with the law.

With this in mind, fintech regulation in Kenya and Africa is moving in the right direction. In recent years, there have been a number of positive developments, including:’

• The establishment of regulatory sandboxes: Regulatory sandboxes facilitate in a real time and controlled environment the testing of products and services, which are not yet fully compliant with the existing regulatory and legal system. Examples of countries in Africa which have embraced the concept of regulatory sandboxes include Kenya ,Nigeria, Rwanda, Ghana , Mauritius, Zambia, Angola, Uganda, Morocco, South Africa and Mozambique etc. In Kenya the Capital Markets Authority (CMA) began admitting fintech application to its regulatory sandboxes as early as March 2019. As soon as the application has been approved then fintechs have a period of 12 months to conduct live tests of their products and/or services. After the 12 months the fintech company is either granted the license to operate in Kenya subject to the other legal requirements or denied the license if they could not meet the required standards.

Such developments are helping to create a more supportive regulatory environment for fintech in Kenya and Africa.

The sector specific regulations are highlighted below:

• Digital payments and remittances :Mobile money which has gained prevalence in Kenya is regulated by the Kenya Information and Communication Act (KICA) 1998 while the National Payment Systems Act (NPSA) regulates payment services providers and payments services .The National Payments Systems Act is an ACT of Parliament to make provision for the regulation and supervision of payment systems and payment service providers, and for connected purposes

• Digital lending :Here the key regulation is the Microfinance Act (2006) provides a regulatory and supervisory framework for microfinance banks and specified non-deposit taking microfinance business .Futhermore the CBK(Digital Credit Providers)Regulations in section 4(1) provides that:

  "A person shall not establish or carry out digital credit business in Kenya or otherwise hold himself out as carrying out digital credit business in Kenya unless that person is licensed by the Bank in accordance with these Regulations, or is a person whose digital credit business is regulated under any other written law.”

  Section 4(2) goes further to state that:

  “A person who wishes to carry out digital credit business in Kenya shall apply to the Bank for a licence in Form CBK DCP 1 set out in the First Schedule.”

  So what are the other requirements when one wishes to set a digital credit business in Kenya. Section 4(3) of the CBK(Digital Credit Providers)Regulations takes care of this. Some of the requirements highlighted in this section include:

  1. A certified copy of the certificate of incorporation

  2. A certified copy of the Memorandum and Articles of Association of the applicant;

  3. Applicant’s registered address

  4. A certified copy of the Memorandum and Articles of Association of any corporate body that has a significant shareholding in the applicant;

  5. A description of, and terms and conditions of credit products and services which the applicant intends to provide;

  6. The other general requirements include a Tax Identification Number(TIN)

  NB:

  It is imperative to note that the registration requirements for fintech companies in Kenya varies with the type of fintech company

• Digital investments: Here the key regulation is the Capitals Markets Act (2000, as amended) which provides provisions relating to the public offering of securities (Part IVA), and asset backed securities (Part IVB). The undertaking of any securities business requires a license, including central depositories. The main regulator in the digital investments space is the Capital Markets Authority(CMA)

• Digital insurance: In the digital insurance space the key regulation is The Insurance Act (1987, as amended) read together with the Insurance Regulations 1986 (as amended) provide that insurance business can only be conducted by registered person. The main regulator is Insurance Regulatory Authority (IRA).

• Digital capital raising: Regulatory framework of digital credit varies by business model. Capital raising institutions have different business models with some lending their own funds against their balancing sheets. To this regard they may not be licensed or regulated unless they have their own internal regulations and stipulations. Where a digital credit leverages mobile money platforms this may fall under the National Payments Service(NPS) Act.

  The following are some of the key regulatory bodies that oversee fintech in Kenya and Africa:

• Central Bank of Kenya (CBK): The CBK is the central bank of Kenya. It is responsible for regulating the banking sector, including fintech companies that provide banking services.

•  National Payment Systems Authority (NPSA): The NPSA is responsible for regulating the payment systems sector, including fintech companies that provide payment services.

• Insurance Regulatory Authority (IRA): The IRA is responsible for regulating the insurance sector, including fintech companies that provide insurance services.

In addition to these sector-specific regulators, there are also a number of cross-cutting laws and regulations that apply to fintech companies. These include:

•  Data Protection Act (2019):The Data Protection Act protects the privacy of individuals' personal data. It includes provisions on the collection, use, and sharing of personal data. The Data Protection Act is an Act of Parliament to give effect to Article 31(c) and (d) of the Constitution; to establish the Office of the Data Protection Commissioner; to make provision for the regulation of the processing of personal data; to provide for the rights of data subjects and obligations of data controllers and processors; and for connected purposes

•  The Consumer Protection Act (2012): The Consumer Protection Act is an Act of Parliament to provide for the protection of the consumer, prevent unfair trade practices in consumer transactions and to provide for matters connected with and incidental thereto’

• Anti-Money Laundering compliance measures: The Proceeds of Crime and Anti-Money Laundering Act(POCAMLA)2009 is the key legal regime that address anti-money laundering compliance measures among fintech companies in Kenya. POCAMLA defines ‘financial institutions as:

  “financial institution” means any person or entity, which conducts as a business, one or more of the following activities or operations—

  (a) accepting deposits and other repayable funds from the public;

  (b) lending, including consumer credit, mortgage credit, factoring, with or without recourse, and financing of commercial transactions;

  (c) financial leasing;

  (d) transferring of funds or value, by any means, including both formal and informal channels; ‘

  (e) issuing and managing means of payment (such as credit and debit cards, cheques, travellers’ cheques, money orders and bankers’ drafts, and electronic money);

  (f) financial guarantees and commitments;

  (g) trading in— (i) money market instruments, including cheques, bills, certificates of deposit and derivatives; (ii) foreign exchange; (iii) exchange, interest rate and index funds; (iv) transferable securities; and (v) commodity futures trading;

  (h) participation in securities issues and the provision of financial services related to such issues;

  (i) individual and collective portfolio management;

  (j) safekeeping and administration of cash or liquid securities on behalf of other persons;

  (k) otherwise investing, administering or managing funds or money on behalf of other persons; (l) underwriting and placement of life insurance and other investment related insurance; and (m) money and currency changing;

  The Act stipulates measures to help in combating anti money laundering by financial institutions by obligating them to register with the Financial Reporting Centre(FRC).

The Way Forward

The future of fintech regulation in Kenya and Africa is bright. There is a strong commitment from governments and regulators to create a supportive regulatory environment for fintech. As the sector continues to grow, we can expect to see even more positive developments in fintech regulation.