OPINION: Reforms in business laws a gamechanger for borrowers, asset financiers

The recent amendments to Kenya's business laws mark a watershed moment for borrowers and asset financiers, offering clarity and regulation in a sector that has long operated in legal limbo.

For years, asset financiers faced uncertainty due to gaps in the law, leaving them without a clear regulatory framework despite their critical role in providing affordable financing to underserved communities, including boda boda operators and small-scale entrepreneurs.

Previously, asset financiers had to identify themselves as Digital Credit Providers (DCPs) to operate under existing legal frameworks.

However, their operations—characterized by face-to-face customer interactions, manual agreements, and bank-based disbursements—did not align with the purely digital nature of DCPs as defined in DCP regulations.

This mismatch highlighted the need for reforms to address the unique needs of asset financiers and ensure they could operate within a supportive legal environment.

The enactment of the Business Laws (Amendment) Bill, 2024, signed into law by President William Ruto, is a landmark achievement that addresses these issues.

The law that came into effect on January 1, has transformed the regulatory landscape, providing much-needed clarity and oversight while empowering borrowers and financiers alike.

Under the new law, non-deposit-taking microfinance businesses—including asset financiers, buy-now-pay-later services, peer-to-peer lending, and credit guarantee schemes—are now placed under the direct oversight of the Central Bank of Kenya (CBK).

This amendment significantly broadens the CBK’s mandate, moving beyond the regulation of digital credit providers to encompass all non-deposit-taking credit providers.

This updated regulatory framework is a game-changer. It addresses the longstanding legal gaps that previously left many credit providers outside the purview of the law. Asset financiers, who were not adequately recognized under the Microfinance Act of 2006 or any other legal framework, now have a clear and structured regulatory environment.

The law now requires all non-deposit-taking credit providers to obtain CBK licensing before commencing operations. This ensures that these businesses adhere to the same high standards as microfinance banks, mortgage finance companies, and digital credit providers.

With this clarity, asset financiers can focus on expanding their reach and providing affordable credit options to Kenyans who have traditionally been excluded from mainstream financial services.

One of the most significant outcomes of the amended laws is the enhanced protection it offers to borrowers.

For years, many Kenyans seeking credit from informal or unregulated providers faced exploitation and predatory practices. The new law prohibits unauthorized individuals or entities from offering credit services, shielding borrowers from unscrupulous lenders.

Transparency is now a legal requirement. Non-deposit-taking credit providers must disclose all costs associated with loans, including interest rates, fees, and any other charges, before borrowers commit. This ensures that borrowers can make informed decisions and reduces the risk of unexpected financial burdens.

The law also emphasizes the confidentiality of borrowers’ personal and financial information, mandating that all providers treat customers with dignity and avoid harassment. These provisions are a significant step forward in protecting borrowers’ rights and fostering trust between financiers and their clients.

For borrowers, the benefits extend beyond protection. The new law expands access to credit by allowing individuals to seek loans not only from microfinance institutions but also from non-deposit-taking businesses.

This inclusivity is expected to drive financial inclusion, providing new opportunities for small businesses, informal sector workers, and individuals who have long been underserved by traditional lenders.

The government’s commitment to reforming and modernizing Kenya’s financial sector is commendable. By addressing regulatory ambiguities and placing all non-deposit-taking credit providers under CBK oversight, the government has created a level playing field for financiers while ensuring borrowers' rights are upheld.

The reforms also promise broader economic benefits. With asset financiers now operating within a clear legal framework, they can confidently scale their operations, driving job creation and economic growth.

Meanwhile, borrowers can access affordable credit with the assurance of fair treatment and transparency, fostering trust and stability in the financial sector.

This progressive legislation reflects Kenya’s growing role as a leader in balancing innovation with regulation in the financial space.

As these changes take root, Kenya is well-positioned to lead by example for other nations looking to integrate this thriving subsector into their financial systems.

The author, Branton Sammy Mutea, is the Deputy Country Manager at Mogo