Chambers 'Fintech 2021' Global Practice Guide

• Published date: 23 March 2021
• Subject Matter: Finance and Banking, Privacy, Technology, Financial Services, Data Protection, Fin Tech
• Law Firm: Bowmans
• Author: Ms Ariana Issaias, Dominic Indokhomi and John Syekei

1. Fintech Market

1.1 Evolution of the Fintech Market

The 2020 Findexable Global Fintech Rankings report placed Kenya number 63 in the global top 100 rankings of the world's leading fintech hub countries in Africa. In terms of African cities, Nairobi was ranked the second largest fintech city hub in Africa. These rankings can be attributed to the presence of an estimated 20% of African fintechs in Nairobi, an emerging ecosystem of local investors, an enabling human resource environment, increased mobile phone penetration and growing interest from global technology firms.

The key driver of the fintech revolution in Kenya has been the collaboration between technology providers, traditional financial institutions, fintech start-ups and regulators, sustained market demand and an open-minded appetite for these types of solutions, and an enabling regulatory framework. Increasingly, partnerships are being formed and integration is occurring between Mobile Network Operators (MNOs) offering mobile money services and traditional financial institutions such as commercial banks. The most popular services being offered as a result of these partnerships are payment solutions, money transfer and access to credit. In this way, commercial banks are able to reach the MNOs' extensive customer bases while the MNOs benefit by increasing the number of services they offer.

There has also been significant growth in digital credit products that use credit-scoring algorithms and provide credit through mobile payment systems. The existence of mobile payment technologies has been a key growth factor for digital credit as these provide a channel for digital credit providers to transfer funds to borrowers and for borrowers to repay the borrowed amounts. The credit transactions are conducted over both the digital credit mobile applications or USSD platforms and mobile payment systems.

The COVID-19 pandemic has created opportunities for the development of fintech products and services, and has fuelled increased use of fintech solutions. For instance, on 16 March 2020, the Central Bank of Kenya (CBK) announced emergency measures to facilitate greater use of mobile money transactions instead of cash. Furthermore, the COVID-19 pandemic has stimulated e-commerce business, which has also led to an increase in the use of electronic payment methods.

As the mainstream use of fintech gains traction in Kenya, commercial enterprises and government entities are exploring the adoption of fintech to promote their efficiency and improve service delivery.

2. Fintech Business Models and Regulation in General

2.1 Predominant Business Models

Three predominant fintech business models emerged in Kenya in 2020, namely digital banking, payment gateways and insurtech.

Digital Banking

Most banks in Kenya have adopted digital platforms to provide their products and services. Customers are able to access their bank accounts, view their account information and statements, transfer funds, carry out foreign exchange transactions and pay utility bills, among others. Certain banks have partnered with MNOs to provide mobile banking services, thereby allowing customers to access their accounts through their phones and to deposit and withdraw funds from their accounts through mobile money wallets.

Payment Gateways

Payment gateways are MNO platforms that facilitate payment for goods and services by customers to merchants or between merchants. The platforms provide integrated payment systems between merchants, banks and other MNOs. The most popular payment gateway in Kenya is MPESA which is owned by Safaricom. Banks also have partnerships with credit card providers, such as Mastercard and Visa, who have also facilitated electronic payments.

Insurtech

Insurance companies have also increasingly adopted online platforms through which customers can view their policy details and premium statements, report and track claims, make service requests and view service providers, among others. Other intermediaries in the insurance business are adopting digital platforms to link insurance companies, customers, agents and other intermediaries.

2.2 Regulatory Regime

There is no separate regime for the regulation of fintech in Kenya, so fintech products and services fall under the existing financial services regulatory framework. Currently, most fintech players are unregulated and where they offer services or products that are regulated, they have an obligation to comply with the regulations applicable to the services or products offered. That said, legislation is being amended to expand the jurisdiction of the CBK to include fintech actors, such as digital credit and financial services providers.

The main regulators of the financial services industry are the CBK, the Capital Markets Authority (CMA) and the Insurance Regulatory Authority. Other regulators that play a role in regulating specific segments of the market or activities relating to it are the Retirement Benefits Authority, the Sacco Societies Regulatory Authority and the Competition Authority of Kenya. Their respective mandates are governed by the following legislation.

• Capital Markets Act, Chapter 485A (and the regulations thereunder), empowering the CMA to regulate the capital markets and all public issuers of securities.
• Banking Act (Chapter 488), which regulates banks and banking business in Kenya.
• Central Bank of Kenya Act (Chapter 491), which establishes the CBK and provides for the supervision of banks and foreign exchange businesses. There is a proposed Central Bank Amendment Bill, 2020 which, if enacted in its current form, would expand the CBK's regulatory jurisdiction over digital financial products and services, digital credit service providers, providers of financial products and the conduct of financial services.
• The National Payment System Act No 39 of 2011 (and regulations), which provides for the authorisation and regulation of payment services and payment service providers (PSPs).
• The Insurance Act Chapter 487 (and regulations) which establishes the Insurance Regulatory Authority (IRA) and provides for the regulation of insurance services, insurers and insurance intermediaries.
• The Retirement Benefits Act No 3 of 1997 (and regulations) which establishes the Retirement Benefits Authority (RBA) and provides for the regulation of retirement benefit schemes.
• The Consumer Protection Act No 46 of 2012 (and regulations) which provides for the protection of consumers, and restrictions against unfair trade practices in consumer transactions.
• The Microfinance Act No 19 of 2006, which provides for the licensing and regulation of microfinance institutions.
• The Savings and Credit Cooperative (Sacco) Societies Act No 14 of 2008, which establishes the Sacco Societies Regulatory Authority and provides for the registration and regulation of Sacco Societies.
• The Competition Act (and regulations), which establishes the Competition Authority of Kenya (CAK), regulates competition and provides for consumer protection from unfair and misleading market practices.
• The Kenya Information and Communications Act No 2 of 1998 (and regulations) which establishes the Communications Authority of Kenya and regulates the information and communications sector (including broadcasting, multimedia, telecommunications and postal services).

Several regulators have also issued guidelines, circulars and directives on the application and interpretation of the statutes.

2.3 Compensation Models

There are no specific provisions on the permissible compensation that industry participants may charge their customers. However, certain general provisions apply to specific players, for instance:

• lenders are prohibited from charging borrowers default interest or prepayment penalties;
• lenders, insurers, and capital market intermediaries (brokers investment advisers, fund managers and dealers) and payment service providers are required, prior to transactions, to disclose the full charges for their services, such as fees, interest rate, penalties premiums, etc (a borrower is not liable to pay any costs that have not been disclosed); and
• payment providers are required to notify the CBK of any material changes to their charges.

2.4 Variations between the Regulation of Fintech and Legacy Players

Most fintech players are unregulated and where they offer services or products that are regulated, they have an obligation to comply with the regulations applicable to the services or products offered. For the most part, new players would partner with legacy players to ensure compliance. However, there are other players who apply for their own licences, especially in the payment services sector. There have, however, been efforts by the regulators and parliament to update the regulations to cover technological developments,eg, as with the Central Bank of Kenya Amendment Bill.

2.5 Regulatory Sandbox

The CMA established a regulatory sandbox to accelerate its understanding of emerging technologies and to facilitate the deepening and broadening of Kenya's capital markets. The sandbox is a platform that will allow testing of innovative products, solutions and services that have the potential to enhance Kenya's capital markets.

In March 2019, the CMA released the Regulatory Sandbox Policy Guidance Note, which provides a framework for the operation of the sandbox.

The sandbox is available to entities that are either incorporated in Kenya or licensed by a securities market regulator in an equivalent jurisdiction; with the intention to offer an innovative product, solution or service in Kenya.

Once the CMA has approved an application to participate in the sandbox, together with the applicant's testing plan, the applicant can proceed with testing the product or service in Kenya. The CMA may, during the testing period, require modifications to be made to the testing plan. During the testing period, the applicants are required to submit interim reports on the...