A banker's perspective on Kenya's evolving regulatory landscape

Central Bank of Kenya headquarters along Haile Selassie Avenue in Nairobi. [Wilberforce Okwiri, Standard]

Kenya is a leading market in financial services innovation, which has played a pivotal role in promoting financial services inclusivity. 

The latest data by the Central Bank of Kenya shows that more than 80 per cent of the adult population accessed formal financial services in 2021 compared with 27 per cent in 2006 when the first FinAccess Household Survey was conducted.  

As the banking sector grows and new business models emerge through innovation and digitisation, a proactive and responsive regulatory regime becomes an important tool in safeguarding the sector’s equity, integrity, public trust and sustainability. 

While different jurisdictions are at different levels of regulatory sophistication, banking sector regulations generally pursue the similar objective of ensuring a safe and sound operating environment to prevent systemic risks and unfavourable outcomes for consumers and other relevant stakeholders. 

In response to the changing operating environment, increased digitisation, adoption of modern technologies, emerging risks and global developments, Kenya’s banking sector regulatory framework has continued to evolve. 

The regulatory developments that we have seen in the recent past are focused on three key themes: consumer protection, market conduct and sustainability. 

Risk-Based pricing 

Over the years, the government has used various policy tools to curb increasing interest rates and promote access to credit by the private sector. 

The most recent policy tool is the Banking Sector Charter which introduced the risk-based credit pricing framework after the repeal of the interest rate cap in 2019. 

Risk-based credit pricing is aimed at instilling fairness and transparency in credit pricing decisions as it allows Banks to price credit based on a customer’s risk profile. With the model, clients with a positive credit history may attract lower lending rates. 

By June 2023,  the CBK had approved the risk-based credit pricing models of 33 out of the 39 licensed commercial banks in the country. Commercial banks are still implementing the approved risk-based pricing models.

While external factors such as the macro-economic environment and access to reliable credit information are relevant in credit decisions, a May 2023 study by the Kenya Bankers Association on risk-based pricing concluded that credit pricing, especially in the tier 1 banks is largely influenced by internal factors namely size of the bank, credit risk, the bank deposits and efficiency level.

Consistent application of internal policy is a key driver to effective implementation of the risk-based pricing framework. The study further concludes that the ideal risk-based credit pricing framework is anchored in each of the bank’s peculiarities. 

Digital lending 

In the wave of credit reforms, digital lenders have not been left behind. 

Following a public outcry on unregulated digital credit providers, including their high cost of credit, unethical debt collection practices and abuse of personal data, the Central Bank of Kenya (CBK) through the Central Bank of Kenya (Amendment) Act, 2021 on Digital Credit Providers (DCPs) is now regulating the digital lenders. 

These reforms give CBK power to rein in lenders who violate consumer protection principles, and this will ensure the existence of fair and non-discriminatory practices in the credit market. Before the law, digital lenders were self-regulating. 

FX code

More recently, Kenya has been forced to relook at its forex trading after the local currency sank 20 per cent against the US dollar in 12 months. 

While movements of both appreciation and depreciation in the exchange rate are normal from time to time, significant shifts over a short period could result in adverse pressure on the country’s economic outlook. CBK’s key mandate is to maintain stability in the financial markets.

In response to the material volatility the CBK developed the Kenya Foreign Exchange Code (FX Code) in March of 2023, and all financial market players were given up to December 31, 2023 to comply.

The FX code seeks to promote a fair, liquid, robust and transparent financial market. It is based on the principles of integrity, good governance, transparent execution of trades, clear and accurate information sharing and proportionate risk management. 

Financial markets plays are now obligated to make additional disclosures to their customers and counterparties, establish appropriate governance forums to identify and report risks associated with financial markets and have policies that detail the processes followed in the FX pricing. 

By now, most Banks should have fully implemented the FX code. 

Curbing illicit financial flows 

Kenya went through a mutual evaluation of its Anti Money Laundering and Combating of Terrorism financing (AML/CFT) by the Eastern and Southern Money Laundering Group (ESAAMLG) from 2021 to 2022.

ESAAMLG is a member of the Financial Action Task Force (FTF”), a global setting standard body for Anti Money Laundering and related crimes. 

Unfortunately, the review identified material deficiencies in the country’s legal and regulatory framework and the effectiveness of the implementation of the existing anti-money laundering, combating of terrorism and countering proliferation financing framework which could risk the country getting into the infamous FATF Grey List. 

In response, we saw the enactment of the very comprehensive AML/CFT (Amendment) Act which seeks to amend various relevant legislations including the Banking Act, Proceeds of Crime and Anti Money Laundering Act, 2009 (POCAMLA); Prevention of Terrorism Act, 2012 amongst others. 

Key changes include the introduction of countering proliferation financing which requires banks to put in measures to prevent financing of proliferation of weapons of mass destruction.

There are now more explicit requirements for countering terrorism financing within the proceeds of crime and anti-money laundering act. 

There are additional customer due diligence requirements, especially concerning the identification of beneficial owners, and foreign politically exposed persons and it addresses the need for ongoing due diligence measures of customers considered to be of higher risk.