REGULATORY FRAMEWORK FOR THE

CREDIT ONLY MICROFINANCE

INSTITUTIONS
By
biasharaleo
-
June 8, 2022

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Caroline Karanja, Chief

Executive Officer, AMFI-K.

Kenya has one of the most developed microfinance sectors in Sub-Saharan Africa. By
estimation, it serves over six million households. Over the years, the sector has played a
pivotal role in enhancing financial inclusion in Kenya. Under the Association of
Microfinance Institutions – Kenya (AMFI-K) membership, the non-deposit taking
microfinance institutions have nationwide coverage. They operate in the rural and urban
areas, serving key economic sectors such as: agriculture, manufacturing, education,
health, water and sanitation among others. Most importantly, besides lending, these
players also offer value add services to their customers like financial literacy training
programmes.

Following the operationalization of the Microfinance Act, 2008, and despite a push by the
non-deposit taking players to be brought under a regulatory ambit in line with Section 3 of
the Act; the sector remains unregulated. This is until recently (August 2021) when the
National Treasury embarked on the process of developing regulations to specify the non-
deposit taking microfinance institutions and prescribe the conduct of their business.

Caroline Karanja is the chief executive officer of AMFI-K. She has a wealth of experience
in finance and strategic management. She recently talked to Biashara Leo magazine about
the business model of non-deposit taking microfinance institutions (also known as credit
only microfinance institutions). Below are the excerpts:

HIGHLIGHT THE PIVOTAL ROLE THAT IS PLAYED BY NON-DEPOSIT-TAKING

MICROFINANCE INSTITUTIONS (MFIS) IN THE SOCIO-ECONOMIC
DEVELOPMENT OF KENYA?

A non-deposit-taking microfinance institution (NDTM) is an organization that offers credit

services-mainly in small amounts- to its clients. It falls under the tenets of the Microfinance Act
– Section 3(2b) – whose regulations are yet to be prescribed by the Cabinet Secretary, National
Treasury. In their businesses, NDTM organizations employ mainly touch embedded with
technology to serve the clients, especially the rural poor with a clear target on impact and life
transformation. NDTMs do not mobilize deposits from the public but take loan guarantee funds
from the clients when lending or extending credit because the clients they serve are poor and
have no assets to secure their loans: for instance title deeds, log books or shares.

This category of MFIs mostly targets micro and small enterprises.

Under the AMFI-K membership, NDTMs have nationwide coverage operating both in rural and
urban areas in Kenya and serving key economic sectors such as: agriculture, manufacturing,
education, health, water and sanitation among others.

In the last few decades, NDTMs have had a very major impact in the rural areas. By and large,
they have contributed to tremendous development in the rural areas where they are the only
known form of organized credit. Microfinance has helped the marginalized to access finance and
take their children to school, hence breaking the vicious cycle of poverty. Some local value
chains can only be developed through microfinance where organizations through donor support
have engaged agronomists and played a great role in market linkages.

HIGHLIGHT THE UNIQUENESS OF THE NON-DEPOSIT TAKING MFIS MODEL?

The uniqueness of the non-deposit taking microfinance business model is notable because they
offer not only credit but also non-financial services such as client financial education and
business management services to individuals and businesses with the aim of empowering and
improving their livelihoods. The services offered by this segment of the microfinance sector are
impactful. They positively transform lives while creating wealth and opportunities. Like formal
financial institutions, NDTMs have human contact as well as prescribed loan processes and
procedures in conformity with the Consumer Protection law and principles.

Another unique feature of the NDTMs (especially the traditional institutions) is that their main
delivery channel is through group lending. Clients from the communities or the same
marketplace form groups and appoint officials. These clients are taken through mandatory
training where they are equipped with financial skills and made aware of the lending policies.
After the training, they are appraised by the institutional credit officers together with their group
officials and then credit is administered on a gradual basis with a co- guarantee mechanism.

AS THE UMBRELLA BODY OF THE MICROFINANCE SECTOR IN KENYA, HOW

DOES AMFI-K SUPPORT THE GROWTH OF NON-DEPOSIT-TAKING MFIS?

AMFI-K is a network that was formed in 1999 by the microfinance institutions to help the
growth and the development of the microfinance institutions. AMFI-K has for over twenty years
taken the lead to advocate for the microfinance industry helping to mobilize funds, lobbying with
the regulators, creating a platform for networking between the players as well as linking the
institutions to investors.

AMFI-K’s value proposition is contingent upon the alignment of its core services to the needs of
its members and effective delivery. AMFI-K provides the following demand-driven services to
its members: policy and advocacy; capacity building for members; research and knowledge
management, networking, and linkages. These core services as highlighted below support the
institutions particularly the NDTMs who require the support for business growth:

Policy advocacy: This area of activity aims at enhancing collective action by its members and
other stakeholders for an enabling policy and regulatory environment for the microfinance sector
in Kenya which in return promotes growth and outreach to low-income people.

Capacity building: This area aims at strengthening the capacity of MFIs in delivering
appropriate and sustainable microfinance services to low-income people, through the
organization and coordination of workshops and training courses as well as effective
management information systems, in order to enhance members’ capacity to manage and operate
their businesses professionally.

Networking and linkages: This area aims at providing regular platforms for members to
enhance effective collaboration among themselves and with other development actors and
relevant stakeholders.

Research and knowledge management: The key objective of this activity area is to provide
members with timely and quality research and information that help underpin the policy and
advocacy agenda, and facilitate industry product design and decision-making processes. This is
an area that promotes immediate value by initiating and promoting interest in research on
microfinance, in order to enhance the understanding of the needs of the microfinance sector,
support informed policy and regulatory reform, product development and replication, and
ultimately improve financial access for the low-income population in Kenya.

WHAT ARE THE BENEFITS OF DEVELOPING REGULATIONS FOR THE NON-

DEPOSIT-TAKING MFIS IN KENYA?

The Microfinance Act was enacted in 2008 following the proliferation of the credit entities that
mushroomed and had an adverse effect on the financial landscape in Kenya as well as the general
public.

Following the operationalization of the Microfinance Act, 2008, and despite a push by the non-
deposit taking players to be brought under a regulatory ambit in line with Section 3 (2b) of the
Act; the sector remains unregulated until only recently (August 2021) when the National
Treasury embarked on the process of developing regulations to specify the non-deposit taking
MFIs and prescribe the conduct of such businesses.

Against this background, all financial institutions, including microfinance institutions, are
subject to a balanced regulation that promotes efficiency and effectiveness to enhance financial
stability and conduct in the market.

Emerging issues and significant areas of concern that necessitate regulation of NDTM
businesses include: anti money laundering and countering financing of terrorism as well as data
security. Other significant areas of concern that will be addressed by these regulations include:
consumer protection, credit information sharing, transaction security, curbing financial crime, tax
and accounting procedures, transformation of institutions, protecting borrowers from over-
indebtedness as well as protecting consumers from abusive practices.

IS THERE ANY APPEAL THAT AMFI-K WOULD WISH TO MAKE TO THE

STAKEHOLDERS CURRENTLY ENGAGED IN THE PROCESS OF DEVELOPING
THESE REGULATIONS?

Kenya has experienced a proliferation of unregulated digital credit providers who extend much
lower aggregate credit compared to commercial banks, microfinance banks and non-deposit
taking microfinance businesses. They however have had an adverse social impact through high-
interest rates on loans, unethical debt collection practices and misuse of personal data with grave
public concerns. This informed the need for CBK to seek an amendment of the CBK Act to
provide for licensing and supervision of digital credit providers not regulated under any other
written law.

The CBK (Amendment) Act was assented to on 7th December 2021 and came into effect on
December 23, 2021. Under the Amendment, CBK is required to publish regulations within three
months of its coming into effect and all persons conducting digital credit business and not
regulated under any other written law are required to apply for a license within six months of
publication of the regulations.
The CBK (Amendment) Act provides for the following definitions:

Digital channel – means the internet, mobile devices, computer devices, applications, or any
other digital system as may be prescribed by CBK;

Digital credit – means a credit facility or arrangement where money is lent or borrowed through
a digital channel;

Digital credit business – means the business of providing credit facilities or loan services
through a digital channel;

Digital credit provider – means a person licensed by the bank to carry out digital credit
business.

The definitions above as provided under the CBK (Amendment) Act, in effect seem to bring all
credit providers not regulated under any other written law, under the ambit of the CBK
(Amendment) Act, 2021.

There is however a clear distinction between the Digital Credit Providers (DCPs) and the Non-
Deposit Taking Microfinance businesses (NDTMBs). DCPs have digital lending as their
model of business without any physical interactions with consumers whereas the NDTMBs
use digital channels only as a means of delivery of credit to consumers just like other
financial institutions in the sector including : commercial banks, microfinance banks, Saccos
and mortgage finance companies among others.

It would therefore be wrong to ignore the existence of the NDTMBs as recognized under the
Microfinance Act 2006 given their formal business operation structures and registration and
classify them as digital lenders. The attempt to bring this category of NDTMBs under the CBK
(Amendment) DCP Act by the mere fact that they are using a digital channel (as defined) without
considering other aspects of their business models is wrong and misinformed. It should be noted
that the NDTMBs have growth and expansion prospects into formal banking institutions as well
as great investment and wealth creation potential, hence having a conducive regulatory
framework is a critical component of this cause.

The specification of the NDTMBs that will fall under these regulations will be determined by the
annual turnover, sources of capital, annual gross loan book, governance and management
structures, number of customers as well as number of staff among other set parameters that are
important in promoting financial sector stability.

The Association of Microfinance Institutions in Kenya (AMFI-K) through its membership

appeals for the support of the National Treasury to fast-track the finalization of the framework to
supervise and regulate NDTM business in Kenya as envisaged in the Microfinance Act 2006.

THE ROAD AHEAD FOR THE MICROFINANCE SECTOR IN KENYA?

The envisaged enterprise growth trajectory for non-deposit taking microfinance businesses is
growth that could lead to transition into microfinance banks and possibly into full-fledged
commercial banks. Without a regulatory framework, this would derail the envisioned long-term
business goal.