UNIVERSITY OF NAIROBI

SCHOOL OF LAW
BACHELOR OF LAWS (L.L.B.)
GPR 423: BANKING LAW
COURSE INSTRUCTOR: Dr. Njaramba Gichuki

Group 9 Assignment: Cash Dispenser Machines and

Mobile Banking
Group Members
MAGETO JERRY C. AGANYO G34/3231/2017

KUTU MICHAEL WAMBUA G34/3272/2017

OTIENO LAURA AWINO G34/3323/2017

SIMON MUTINDA MASILA G34/3224/2017

KARIUKI BENSON NJURU G34/3222/2017

ROBERT ODHIAMBO G34/3236/2017

Table of Contents
1.CASH DISPENSER MACHINES (ATMs) 1
1.1 Introduction 1
1.2 Available legal framework for ATMs in Kenya 2
2. PLASTIC CARDS 4
2.1 Types of Plastic cards 4
2.2 Liability of Plastic Cards 6
3. MOBILE BANKING- LISCENCED FINANCIAL INSTITUTIONS 7

3.1 Introduction 7
3.2 History 7
3.3 Laws and Regulations 9
3.4 Challenges 10
4. MOBILE BANKING SERVICES PROVIDED BY MOBILE NETWORK OPERATORS 11
4.1 Introduction 11
4.2 The Development of Mobile Money Platforms in Kenya 11
4.3 Regulatory Framework for Mobile Money Transfer Platforms 13
4.4 Benefits of Mobile Money Transfer Platforms 15
4.5 Challenges Facing Mobile Money Transfer Platforms 15
4.6 Recommendations 16
5. MOBILE LENDING 17
5.1 Introduction 17
5.2 Emergence of Digital Lending in Kenya 17
5.3 Regulation 18
5.4 Challenges 19
5.5 Conclusion 20
BIBLIOGRAPHY 21
 1.CASH DISPENSER MACHINES (ATMs)
1.1 Introduction

Cash Dispenser Machines more popularly referred to as Automated Teller Machines, or rather
ATMs, have transcended from being a novel way of carrying out banking transactions to part of
the average Kenyan’s life as they offer round the clock access to one’s bank account.

The first ever ATM was unveiled by Barclays Bank in its Enfield Town branch, North London in
the year 1967.1 This revolutionary innovation only made its way to Kenya in 1995 at Barclays’
very own Queensway House Branch.2 ATMs are simply bank-operated electronic
telecommunication devices that enable customers to process transactions on their accounts.
These machines have come a long way from simply dispensing cash to literally serving as mini-
branches with a touch of privacy as today bank customers can access their accounts easily at any
time practically anywhere, order bank statements or cheque books, deposit, withdraw and even
transfer funds.

Given these machines’ long unwavering existence in the Kenyan banking scene, it would be
shocking to learn that our Banking Act3 does not provide for or reference electronic banking. The
world has gone through three great ages of payment; cash (notes and coins), paper-based
payment (for example, cheques) and now the electronic form4 yet it seems our law is somewhat
lagging behind. The same law that we legal scholars ever claim to be a social construct that
changes and evolves with the growing needs of a society. Still, this paper shall proceed to look at
the legal framework, if any, provided for the governance of cash dispenser machines in Kenya.

1
Colin Gordon, ‘A History of ATM Innovation’ (NCR, 21 February 2017)
<https://www.ncr.com/company/blogs/financial/history-atm-innovation#/> Accessed 24 November 2020
2
Aurolah Hiuko Mirigu, “The Usage of Automated Teller Machines Case Study: Barclays Bank of Kenya” [2008]
3
Cap 488, Laws of Kenya
4
Kethi D. Kilonzo, “An Analysis of the Legal Challenges posed by Electronic Banking” [2007] 1 Kenya Law
Review 326

1
1.2 Available legal framework governing use of ATMs in Kenya

Lack of strong, adequate legal and institutional framework has not been suitable to electronic
banking. Cash dispensers, themselves not being immune to this gap and embarrassing foresight,
have had to clutch onto scanty framework for governance. This mainly involves the law of
contract, agency and the customs and usages of banking.

Application of an ATM card enters a bank customer into contract with the bank for the provision
of ATM services. Certain clauses are included in the document as the customer makes the
application. These include:5

1. Warning of the risks of giving the ATM card to another person. A person in possession of
another’s card and knowledge of their pin might abuse the card.
2. A clause requiring that in case of loss of the ATM card, the customer report to the bank
immediately or rather as soon as possible. Most banks cancel and invalidate cards owners
report as missing thus rendering them useless to any party who might be holding them.
Failure to report such loss absolves the bank of liability of any losses incurred in case of
use of the card subsequent to the unreported loss.
3. Requirement of customer to store their card and PIN number separately. After
memorization the customer is advised to destroy the PIN number to reduce risk of
unauthorized use or fraud. What happens today though is upon issuance of an ATM card,
the bank asks the customer to set a PIN number for themselves; that is memorable
thereby reducing such risk even further.
4. A clause asking the customer to keep their PIN secret as breach of this duty passes
liability of any loss incurred to them.
5. A clause stating that the bank is authorized to debit all amounts processed from the
customer’s end even where system failure, error, theft or misuse of the card and PIN was
involved.

5
Njaramba Gichuki E., Law of Financial institutions in Kenya (2nd edition, 2009), p.211

2
Such clauses in the contract help govern bank-customer relationships where use of ATM is
involved and somewhat define groundwork for where liability and fault should lay in the event
of breach of a certain duty as prescribed between them.

Banks in turn must keep their ATMS in order. Instances where the customer may hold the bank
liable include;6

1. Where ATM accepts the card, correct PIN and instructions but yet dispenses no cash.
2. Where customer’s account is debited without their instruction(s), bank is liable to
compensate and reverse.
3. Where customer alleges that they did not withdraw money recorded in a statement,
burden of proof lies with the bank failure to proving of the same warrants a
compensation.

It is therefore evident that there is a vacuum where e-banking in Kenya is concerned and that
the vacuum need be filed soon by effective, strong framework.

6
Ibid, p.210

3
 2. PLASTIC CARDS

Plastic cards are payment cards made up of plastic that are used to facilitate payments instead of
hard currency. They are also used in cash dispensing machines (ATMs) to withdraw cash. The
use of plastic cards dates back from the 1960s in the United States of America7. From then
onwards, there has been tremendous increase in the usage and the innovations to enhance the
effectiveness and the security of these cards all over the world.

2.1 Types of Plastic Cards

The most prevalent types of cards issued by commercial banks in Kenya today include:

1. Credit cards
A credit card is a plastic card issued by banks in conjunction with plastic card issuers like
VISA, MasterCard American Express, among others. The cards are used to advance
credit facilities to customers which can subsequently be used to make purchases. The
customer gets a statement at the end of the month where they are also required to settle
the credit advanced plus interest. Before issuing a credit card to a customer, a bank has to
appraise the customer’s credit-worthiness. There are different cards depending on the
limit and status, VISA credit card for example has a whole range from Classic to Infinite
depending on the customer’s financial status8.
There are various legal relationships that are involved whenever a credit card holder uses
the card to pay for retail goods. These relationships include: the relationship between the
cardholder and the retail outlet for the sale of goods at an agreed price, the cardholder and
the credit card company that specify the terms of the credit facilities including limits and
payment plans9, the one between the credit card company and the merchant retail outlet
with the terms of how the money will be reimbursed and the commission to be charged.
2. Debit Cards
Debit cards are plastic cards that allow the cardholder to access funds in their account.
The major difference between this card and credit cards is that while credit cards mainly

7
The history of credit cards (timeline & major events)
<https://www.creditcards.com/credit-card-news/history-of-credit-cards/>Accessed on 22 November 2020
8
Visa Credit cards <https://www.visa.co.ke/pay-with-visa/find-a-card/credit-cards.html> Accessed on 22 November
2020
9
Re Chare Card Services Ltd [1988] 3 ALL ER 702

4
 have some kind of credit arrangement with the cardholder, with the debit card, the
customer only has access to the money available in their account. They are used for
various reasons including shopping, ATMs and Agents withdrawals and even online
shopping. Their security has evolved and with increased fraud incidents reported in the
past, the Kenya Bankers Association recommends the issuance and use of cards that are
protected via the combined technology of chip and pin which is more secure than the
previously used magnetic strip10.
3. Prepaid Cards
These types of cards on the other hand are not connected to a specific account but they
are pre-loaded with money and can subsequently be used to purchase certain items.
Several commercial banks in Kenya like offer these types of cards. They are mainly used
to make small purchases like bus fare. Some schools also encourage the use of this card
instead of hard currency as pocket money by the students11.There are also banks that
issues multicurrency pre-paid cards to facilitate online transactions in different
currencies.
A multipurpose card combines the functions of the three basic types of cards i.e., cheque
guarantee card, ATM card and the Electronic Funds Transfer at The Point of Sale
(EFTPOS) into one card protected by a chip and pin12.
The use of some type of plastic cards like the cheque guarantee card has continued to
decline globally with most countries moving away from the usage of cheques as the
primary means of business payments. The usage of the card in Kenya is very limited and
our research didn’t show a single commercial bank that offers such a card.

Plastic cards present an array of advantages to their holders including portability,

increased security from petty thefts as opposed to hard currency and easier accessibility
10
Kenya Bankers association, ATM safety campaign <https://www.kba.co.ke/atm_safety_campaign.php > Accessed
on 22 November 2020
11
Altra Federal Credit Union, Checking
Visa® Reloadable Student Prepaid Card <https://www.altra.org/personal/checking/visa-prepaid-cards/visa-
reloadable-student-prepaid-card#:~:text=A%20reloadable%20prepaid%20debit%20card,receive%20a%20Student
%20Prepaid%20Card> Accessed on 22 November 2020
12
Gichuki (n.5)

5
 compared to going to the bank to transact. However, on the flipside, there has been many
security concerns especially through online fraud13 which has increased the risks
associated with the card. Studies have also shown that the cards are known to cause
impulse buying which might lead to overspending14.

2.2 Liability of Plastic Cards

In the case of Cooperative Bank of Kenya v Parsaloi Lasoi15 The court considered an appeal over
the loss of funds from a customer’s account via an ATM card. The court noted that the bank
customer relationship is contractual in nature governed by the terms and conditions. The bank
can only assume liability if it issued the card negligently without proper due diligence or where
the loss was occasioned by a fault in their systems or their machines. The customer however
remains liable in a case where the loss was occasioned by his negligence in disclosing the pin or
exposing the card to third parties. In the case above, the bank was found to be at fault and was
liable to pay special damages.

3.MOBILE BANKING- LISCENCED FINANCIAL INSTITUTIONS

3.1 Introduction

13
Wambui Waweru, DCI Urges Vigilance In The Face Of Increased Online Fraud, Capital FM, Nairobi. Available
at <https://www.capitalfm.co.ke/business/2020/01/dci-urges-vigilance-in-the-face-increased-online-fraud/ >
Accessed on 22 November 2020
14
Nor Asiah Omar, Ruzita Abdul Rahim, Che Aniza Che Wel, Syed Shah Alam, Compulsive buying and credit card
misuse among credit card holders: The roles of self-esteem, materialism, impulsive buying and budget constraint,
Intangible Capital vol 10, Available at <https://core.ac.uk/download/pdf/41791275.pdf > Accessed on 22 November
2020
15
Cooperative Bank of Kenya v Parsaloi Lasoi [2019] eKLR

6
Mobile banking (m-banking) refers to provision and availment of banking and financial services
through the help of mobile telecommunication devices16.

Neither the Banking Act or the Central Bank of Kenya Act defines Mobile Banking however the
Central Bank of Kenya is mandated to regulate financial services within the country and this
includes Mobile Banking, Mobile Money Transfer Services and Mobile Money Payment
Services.

In Kenya today, mobile banking can be effected through dedicated mobile banking apps such as
Eazzy Banking and MCOOPCASH or through USSD codes such as *522# for KCB and *722#
for Standard Chartered Bank. Both methods however require the user to have a bank account
with the respective bank and to have registered for mobile banking.

3.2 History

Co-operative bank pioneered mobile banking way back in 2004 by enabling customers to access
their accounts and transact using their mobile phones. It offers services such as balance
enquiries, mini-statements, SMS alerts on credit and debit transactions to an account, pay utility
bills and funds transfer17.

However, the most significant early step in mobile financial services in Kenya can be traced to
the first mobile money transfer service M-Pesa which was introduced by telecommunications
company, Safaricom in 200718. This was an innovative method that would enable more Kenyans
to easily transfer their money from one person to another and would also help increase
Safaricom’s customer base.

In the thirteen years since the introduction of M-Pesa, mobile financial services have increased in
volume and quality. The transactions being conducted through mobile have expanded from
16
Kenya Bankers Association Centre for Research on Financial Markets and Policy, ‘The Mobile Banking Survey ’
(January 2014) <https://www.kba.co.ke/downloads/Mobile%20Banking%20Survey.pdf> Accessed 25 November
2020.
17
Kennedy Okiro, Jacky Ndungu, ‘THE IMPACT OF MOBILE AND INTERNET BANKING ON PERFORMANCE
OF FINANCIAL INSTITUTIONS IN KENYA’ (May 2013) European Scientific Journal May 2013 edition vol.9,
No.13 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
<https://profiles.uonbi.ac.ke/kennedyokiro/files/the_impact_of_mobile_and_internet_banking_on_performance_of_
financial_institutions_in_kenya.pdf> Accessed 25 November 2020.
18
Central Bank of Kenya, ‘BANK SUPERVISION ANNUAL REPORT 2018’
<https://www.centralbank.go.ke/uploads/banking_sector_annual_reports/1174296311_2018%20Annual
%20Report.pdf> Accessed 24 November 2020

7
transfer of money from one person to another to now include access to credit facilities, loans and
savings accounts, payment of bills and buying of goods19.

There has also been an increase in mobile finance Service Providers. In the Telecommunications
sector today we have products such as M-Pesa (Safaricom), Airtel Money (Airtel), T-Kash
(Telkom) among others. In the Banking sectors, a majority of the banks have either mobile
banking apps or USSD codes for mobile banking. These include Eazzy Banking (Equity Bank),
PesaPap (Family Bank) and MCOOPCASH (Co-operative Bank of Kenya).

Mobile Financial Services has also experienced significant growth as seen in Table 120:

Digital Financial Inclusion 2007-2018 2007 2012 2018

Mobile Subscribers (million) 11.34 30.73 49.5

Mobile Money Subscriptions (million) 1.35 21.06 31.62

Avg Value of Transactions (Daily) (Ksh. 126.67 5,005.3 12,666.7

million)
Active Mobile Money Agents 1,582 76,912 223,931

3.3 Laws and Regulations

Under S. 2 of the Banking Act21 a bank is one that conducts banking business which is the
accepting from members of the public of money on deposit repayable on demand or at the expiry
of a fixed period or after notice. By this definition transactions carried out by licensed financial

19
Ibid
20
Ibid
21
Banking Act, Act No. 9 of 1989

8
institutions despite them being electronic in nature still qualify as banking business. As such,
these transactions are regulated by the Central Bank of Kenya by dint of S. 4A of the Central
Bank of Kenya Act22 (hereinafter referred to as the CBK Act) which gives it the authority to
supervise authorized dealers.

In Kenya today, financial institutions have partnered with telecommunications companies in

order to more easily provide financial services to their customer base. This has created a hybrid
model where the banking and telecommunications institutions are not clearly distinct. An
example of this is the KCB M-Pesa and M-shwari products offered by Safaricom for its M-Pesa
subscribers. These products allow their customers to open savings accounts, make deposits and
withdrawals to their accounts, take loans and repay such loans. It is however important to note
that these banking services are not offered by Safaricom itself but rather banks that it has
partnered with. Such as KCB for KCB M-Pesa and NCBA for M-shwari. These allows for
customers to transfer funds from their bank accounts to their e-wallet with their preferred
network providers.

The Central Bank of Kenya is also empowered by the CBK Act to formulate policies for the
regulation of an efficient and effective payment and settlement system23. The National Payment
Systems Act24 defines a payment service provider as a person, company or organization acting as
provider in relation to sending, receiving, storing or processing of payments or the provision of
other services in relation to payment services through any electronic system. As such payment
services conducted through electronic means still fall within the ambit of the Central Bank of
Kenya.

3.4 Challenges

The biggest challenge that has arisen from the development of mobile banking in Kenya has
been data fraud and cybertheft. This has been due to weak security of data systems within the
banking and telecommunication institutions. This however has not been widespread.
Consequently, the Central Bank of Kenya has issued a Guidance Note on Cybersecurity25 in
22
Central Bank of Kenya Act, Act No. 15 of 1966
23
Ibid
24
National Payment Systems Act, Act No. 39 of 2011
25
Guidance note on Cybersecurity, August 2017

9
adherence to its power under S. 33(4) of the Banking Act. This Guidance Note has thus set
minimum standards that institutions have to follow in order to mitigate cyber risk. This includes
the establishment of the Chief Information Security Officer within each financial institution who
shall be in charge of cybersecurity and cybersecurity systems. Also included are conducting of
regular independent assessments and tests to establish the efficacy of the cybersecurity system.

4.MOBILE BANKING SERVICES PROVIDED BY MOBILE NETWORK

OPERATORS

4.1 Introduction

In Kenya, mobile money transfer is enabled by the Central Bank of Kenya (CBK) which allows
telephone service providers to proffer mobile banking services in conjunction with licensed
financial institutions. Mobile service providers have created transfer platforms through which

10
transactions can be conducted across all the service providers. Examples of these platforms are
M-Pesa by Safaricom, T-Kash by Telkom and Airtel Money by Airtel. A survey conducted in
2014 revealed that the market size of the mobile money industry is about 17 million users who
transfer roughly Kshs. 2 billion per day. Of this, the survey reveals, about 14 million users are
M-Pesa customers.26

4.2 The Development of Mobile Money Platforms in Kenya

Mobile services in Kenya were pioneered by the Extend Total Access Communication System
(ETACS) in 1992.27 This analog system was officially launched in 1993 and was only available
to the few elites who could afford it. Five years later, CCK licensed Safaricom Limited and
Kencell Communications (now Airtel), which introduced competition in the mobile phone
industry. 28

By 2008, Kenya had a steadily growing banking industry with about 19% of the total population
owning bank accounts.29 However, like in other developing countries, it was considered a luxury
that could only be afforded by the rich who were capable of paying the exorbitant fees and by
those people who lived in or in close proximity to urban centers in which bank branches were
situated. Since about 70% of the population was residing in rural areas, access to basic
infrastructure as well as financial services was very limited.30

According to a Financial Access Survey carried out in 2006, traditional banking had a very low
reach, with more than one third of the total population excluded from accessing financial
services.31 It was around this time when M-Pesa was introduced. This invention placed Kenya on
the global map as one of the pioneers of mobile banking. It changed the banking landscape by
bringing banking services closer to people who either could not afford traditional banking or
could not access it.

26
“The Mobile Banking Survey” (n.16)
27
Ibid page 6.
28
Ibid.
29
Ibid, Page 10.
30
Ibid.
31
Ibid.

11
Within three months of its launch, about 111, 000 people had registered for M-Pesa.32 A year
later, M-Pesa had a total of 1.6 million registered users and a vast network of more than 1, 200
agents all over the country that facilitated registration, deposit and withdrawal of money.33
Seeing the potential of mobile money transfer platforms, other service providers followed suit
and began introducing their own mobile money systems. However, M-Pesa still dominates the
mobile money transfer sector with about 30 million users in 10 countries.34Its users also claim it
is cheaper, more reliable, faster and safer. Majority of its users are certain that should it be shut
down, they would suffer significant consequences. 35Airtel Money and T-Kash were launched in
2011 and 2018 presumably following the success of M-Pesa in the mobile money sector.
Although they have not experienced as much success as M-Pesa, they still make a big
contribution to the mobile money industry.

Currently, Kenya is ranked among the top countries in the Financial and Digital Inclusion
Program (FDIP) as one of the countries that have strived to develop their finance sector,
including by adopting a wide variety of mobile money services.36

4.3 Regulatory Framework for Mobile Money Transfer Platforms

Although mobile phone operation is generally regulated by the Communications Commission of

Kenya (CCK), mobile money services require more skill than can be offered by communication
experts because it comprises aspects of banking and information and technology (IT)37.However
some of the statutes do deal with mobile financial services.These statutes include;
32
Ibid, Page 11.
33
Ibid.
34
“What Kenya's Mobile Money Success Could Mean for the Arab World” (World Bank)
<https://www.worldbank.org/en/news/feature/2018/10/03/what-kenya-s-mobile-money-success-could-mean-for-the-
arab-world> Accessed 26 November 2020
35
Ibid.
36
“Mobile Banking Leads the Way in Kenya - Banking Frontiers” <https://bankingfrontiers.com/mobile-banking-
leads-the-way-in-kenya/> Accessed 26 November 2020
37
Gichuki (n.5)

12
 A. The National Payment System Act 2011

This act was enacted to oversee the operation of payment systems and other related issues. This
act defines a “payment instrument” as an instrument which enables one to acquire goods,
services or money or to pay for a good or a service. It goes further to define a “payment service
provider” as a persons or companies whose business is to provide, send, receive, store or process
payments using electronic media.38 This definition places mobile money services under the
regulation scope of this act. This act authorizes the Central Bank of Kenya (CBK) to regulate and
supervise mobile money systems to promote proficiency.

However, the general feeling is that this act has failed tremendously in its capacity as the
national law of payment systems in the country since it has failed to address some very important
issues in that sector. Examples of issues it does not address include the need for the
establishment of efficient procedures to be employed when handling risks, the requirement of
maintenance of high standards of operational dependability by mobile money systems and
establishment of a clearly defined criterion for the engagement of the public.39

B. National Payment System Regulations, 2014

These regulations entered force on 15th of August 2014 after the issuance of Legal Notice No.
109 of 2014 by the Cabinet Secretary for the National Treasury. These regulations address issues
of consumer protection such as disclosure of terms and conditions of service, privacy
maintenance, data confidentiality and redress of consumer complaints.40 They also provide for
the recognition of the Payment Service Provider Management Body (PSPMB) whose function is
to facilitate settlement and clearing for digital mobile transactions that are established by service
providers. It also serves as the communication channel through which its members can reach the
CBK and as a platform through which issues of common interest can be discussed.41

38
National Payment System Act, s. 2
39
“LEGAL AND REGULATORY FRAMEWORK FOR MOBILE BANKING IN KENYA ...”
<http://erepository.uonbi.ac.ke/bitstream/handle/11295/104304/Final version LLM thesis Aug 2018...pdf?
sequence=1&isAllowed=y> Accessed 25 November 2020
40
“Kenya’s New Regulatory Framework for e-Money Issuers ...”
<https://www.gsma.com/mobilefordevelopment/country/kenya/kenyas-new-regulatory-framework-for-e-money-
issuers/> Accessed 26 November 2020
41
Ibid

13
 C. The Competition Act

This act establishes the Competition Authority of Kenya42 which aims at improving the welfare
of people by promoting healthy competition in various markets and preventing harmful market
conduct throughout the country. It seeks to regulate such services as mobile money services.
However, its sphere of operation is limited to such an extent that it fails to outlaw collusion and
creation of cartels by competing companies to hike prices illegally. Mobile money providers may
take advantage of this loophole to exploit customers.43

D. Consumer Protection Act, 2012

This act intends to monitor the relationship between sellers and consumers of products.
Consumer protection legislation in Kenya derives legitimacy from article 46 of the constitution
of Kenya44 which provides for the right consumers have to receive quality goods and services. As
regards the mobile money industry, this act provides by implication that there ought to be
measures that ensure safety, transparency and accountability when it comes to digital
transactions.

In as much as this law is applicable to the mobile money industry, it does not specifically provide
for some principles which are of paramount importance and which every competent regulatory
authority should address such as anti-money laundering measures, establishment of complaint
resolution channels and measures that would safeguard funds of customers against loss.45

4.4 Benefits of Mobile Money Transfer Platforms

 Ease of operability – The technology used to design mobile money systems is simple
and does not require highly technical operating systems to function. For this reason, even
low-income earners with less sophisticated and inexpensive mobile handsets can easily
access mobile money services.

42
Competition Act No. 12 of 2010, s. 7(1).
43
“The Mobile Banking Survey” (n.16)
44
Constitution of Kenya, Art. 46(1)(a).
45
“What Kenya’s Mobile Money Success could mean for the Arab World” (n.35)

14
  Convenience – Unlike in traditional banking, customers do not have to queue for long
hours in banks waiting to transact; they can conduct transactions at their own
convenience from whichever location they may be.
 Financial security – The use of cashless transactions reduces the risks inherent to
physical handling of cash like loss or theft thereby enhancing financial security.

4.5 Challenges Facing Mobile Money Transfer Platforms

 System delays – Sometimes mobile service providers experience system breakdowns

which cause delays to customers using them. Similarly, when the systems temporarily
shut down for maintenance, a lot of customers may get inconvenienced.
 High transaction costs – Since mobile banking is largely unregulated, service providers
may take advantage of the situation to impose high transaction costs.
 Transaction limit – Some mobile money transfer platforms-M-Pesa for example- have
set a limit on the amount of money that can be transacted by one customer in a day. This
may be inconvenient to someone who wishes to transact an amount larger than the
stipulated amount.
 Security concerns – The digital nature of these platforms makes them prone to fraud
since it is not easy to authenticate a customer digitally. Additionally, the employment of
wireless technology in conducting mobile banking makes the systems prone to data theft.

4.6 Recommendations

 High level encryption technology- Due to the sensitive nature of financial data, service
providers ought to use high level encryption technology to prevent intrusion/data theft by
unauthorized third parties. Antitheft measures such as the use of biometric identifiers to
authenticate the identity of account owners before a transaction is authorized should be
introduced to reinforce data security.

15
  Regular maintenance of mobile money transfer systems – This would help manage the
capacity of these systems as well as address the issue of system delays which can be
highly inconvenient to customers.
 Employment of well –remunerated, highly qualified and disciplined ICT staff- This
would eliminate or at least greatly reduce cases of loss of funds through fraud in mobile
money platforms.

5. MOBILE LENDING

5.1 Introduction

16
Money lending for a very long time was a preserve of commercial banks which dominated the
Kenyan credit market. As a result, many private individuals alongside SMEs and big
corporations relied on credit facilities from commercial banks.46

Before digital lending came into effect, getting a loan from a bank in Kenya would have required
traveling long distances to the nearest branch, speaking to a loan officer, gathering together
documents, submitting an application and hoping for the best.47 This process was costly for the
average earner because it took days and involved out-of-pocket costs such as paying for
transportation. Similarly, for the bank, extending these kinds of loans was also costly. It required
having staff that could screen an applicant and gather information or collateral in order to make a
judgment about their creditworthiness. Digital loans have transformed the process for both
borrowers and lenders.48

5.2 Emergence of Digital Lending in Kenya

M-shwari, Kenya’s first digital banking product offered by the Commercial Bank of Africa
(CBA) was launched some time in 2012 supplied over 20 million loans to 2.6 million borrowers
in its first two years.49 Thereafter, in 2015, Safaricom launched KCB-MPESA which saw a rise
in digital lending with more than double the number of loan accounts opened since the launch of
the first digital lending platform.50

Since then, more digital lending services have stormed the credit services market with these
applications taking advantage of the growing world of technology. These digital lending
applications are accessible on play store and to anyone owning a smartphone. Some of these
mobile lending applications that are downloadable on Google play store include; Tala, Branch,
O-Kash, O-Pesa and others just to list a few.

5.3 Regulation

46
Nganyi, A., 2020. Mobile Money Lending In Kenya – A Critique Of The Financial Markets Conduct Bill, 2018. |
Wamae & Allen. [online] Wamaeallen.com. Available at: <https://wamaeallen.com/mobile-money-lending-in-
kenya-a-critique-of-the-financial-markets-conduct-bill-2018/> Accessed 27 November 2020
47
(S3-eu-central-1.amazonaws.com, 2020) <https://s3-eu-central-1.amazonaws.com/fsd-circle/wp-
content/uploads/2018/10/18162055/Digital-Credit-in-Kenya.pdf> Accessed 27 November 2020
48
Ibid
49
Ibid
50
Ibid

17
Digital lending remains largely unregulated as such there has been a call to regulate the mobile
lending sector. In order to assert their rights, lenders and clients currently rely on several
legislations including the law of contracts and consumer protection acts. Such references bring
confusion and create loopholes because these legislations are not specific to the digital lending
market.51

Mobile lending in Kenya operate with no bespoken legislation. They are exempt from
classification as financial institutions under the Banking Act and Microfinance Act, permitting
them to side-step supervision and regulation by the CBK.52

In 2018, there was an attempt by the National Treasury to draft the Financial Markets Conduct
Bills which was aimed at regulating market conduct. Under section 64 of the proposed bill
required all regulated credit contracts to be in writing in prescribed form. This therefore,
excludes digital lenders which do not enter into written contracts with borrowers.53

In the same year, CBK proposed a Banking Charter seeking to offer a form of regulation to
mobile lenders. The Charter sought to provide a disciplined and regulated environment for all
financial institutions and entities.54

5.4 Challenges

1.Interest Rates

The rates charged by mobile lenders are exorbitant and are not regulated. This is because app-
based lenders are not subject to the interest-rate cap law that took effect in September of 2016

51
Nganyi (n.47)
52
“Regulation of Mobile Lending Entities In Kenya | MMAN ADVOCATES” (Mman.co.ke, 2020)
<https://mman.co.ke/content/regulation-mobile-lending-entities-kenya> Accessed 24 November 2020
53
Nganyi (n.47)
54
“Regulation Of Mobile Lending Entities In Kenya” (n.53)

18
with the promulgation of the Banking Amendment Act, which limits loan interest rates to 4
percentage points above the central bank reference rate.55

Moreover, the in Duplum rule does not apply to them and therefore the danger that arises is the
fact that the borrower can pay an interest that is more than twice the principle sum lent to the
borrower.56

2. Unfair Terms

The terms of contracts entered into by the borrower are usually unfair and most borrowers are
usually ignorant of what they are signing up for because of the urgency and desperation to access
credit, most borrowers hardly read the terms and conditions nor do they get the opportunity to
seek independent legal device.57 Therefore, a bad bargain is not a defense in court since it is a
precondition to the loan granted that borrowers read before accepting the terms and conditions of
the terms.58

3. Know Your Customer (KYC) Compliance

KYC is the process by which a financial institution verifies the identity of its clients and
suitability. In Kenya, this is a statutory obligation under section 45 of the Proceeds of Crime and
Anti-Money laundering Act which states.

“a financial institution is under an obligation to take reasonable measures to satisfy itself as to

the true identity of any applicant seeking to enter into a business relationship with it by
requiring the applicant to produce an official record capable of establishing the true identity of
the applicant.”

KYC is a challenge in mobile lending. This is because, mobile lending takes up the digital space
and therefore a lender cannot easily ascertain the true identity of the borrower. This is
detrimental to the lender because in a case where the borrower does not have the mental capacity
to enter in to such a transaction will result in the contract being unenforceable by reason of
incapacity.59

55
“Digital Credit in Kenya” (n.48)
56
Nganyi (n.47)
57
Ibid
58
Ibid
59
Ibid

19
Also, due to the nature of mobile lending, physical interaction between the borrower and the
lender is not required. As a result, the borrower may obtain private identification details of
another person and falsely represent himself as that person. Where the borrower fails to repay the
loan, the credit facility usually forwards the name of the defaulter to the Credit Reference
Bureau. This in turn results in serious implications.60

Therefore, questions arise as to what happens when a person’s name is mistakenly forwarded?
Can a claim in defamation suffice?

4. Privacy

Digital lending apps have often been criticized for access of private data or borrowers such as
GPS data, call logs, contact lists and texts such as bank balance messages and bill payment
receipts to determine credit worthiness. Therefore, the newly enacted Data Protection Act is a
step essential to ensure that borrowers’ privacy is achieved.61

5.5 Conclusion

It is imperative that the National assembly enact legislation to regulate mobile lending or amend
existing legislation i.e. the Banking Act and the Micro Finance act, to include mobile lending
applications within the scope of its definition of financial institutions for purposes of effectively
regulating mobile lending which is fast growing in popularity.

BIBLIOGRAPHY

Constitutions

1. Constitution of Kenya, 2010

60
Nganyi (n.47)
61
Ibid

20
Legislation and policy

1. National Payment System Act 2011.

2. National Payment System Regulations, 2014.
3. The Competition Act 2010.
4. Consumer Protection Act 2012.
5. Central Bank of Kenya Act, No. 15 of 1966.
6. Banking Act, No. 9 of 1989.
7. Guidance note on Cybersecurity, August 2017.

Cases
1. Re Chare Card Services Ltd [1988] 3 ALL ER 702
2. Cooperative Bank of Kenya v Parsaloi Lasoi [2019] eKLR

Books and Articles

1. Gichuki N, Law of Financial Institutions in Kenya (LawAfrica 2013)

2. Aurolah Hiuko Mirigu, “The Usage of Automated Teller Machines Case Study: Barclays
Bank of Kenya” [2008]
3. Kethi D. Kilonzo, “An Analysis of the Legal Challenges posed by Electronic Banking”
[2007] 1 Kenya Law Review 326

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23