Tightening the screws

Kenya Moves To Wipe Out Money Laundering Among Digital Lenders

By  |  April 19, 2022

The Central Bank of Kenya (CBK) has for the past year worked aggressively toward regulating digital lenders. The most recent regulations will take effect starting September 18, 2022. Part of this is a requirement that all lenders disclose the source of their funds, in a bid to curb money laundering, Gadgets-Africa reports.

Under these regulations, digital lenders must give details of their investors and prove they are not laundering money or funding criminal activities.

As far as the CBK is concerned, digital loans can be abused by bad actors such that they become a conduit for money laundering while making loan disbursement seem easy. Digital lenders in Kenya were previously not required to disclose the source of their funds, making them an easy outlet for bad actors intent on cleaning dirty money.

Thus, digital lenders will now be mandated to follow all provisions of anti-money laundering legislation, including publicizing large and suspicious transactions to the Financial Reporting Centre (FRC). A high-value transaction includes cash exceeding KES 1 M (~USD 8.6 K).

A breach of the anti-money laundering laws attracts a fine of up to KES 25 M (~USD 216 K) for financial institutions or a jail term of up to 14 years or KES 5 M (~USD 43 K) fine for individuals involved.

There has been a surge in digital lenders in Kenya, and their unregulated practices have not progressed without consequences. Many have turned predatory and unscrupulous in their loan recovery mechanisms as well. Also, due to the widespread abuse of the credit information sharing system, these lenders were notified to stop filing reports with credit reference bureaus (CRBs) last year.

The latest changes to the Central Bank Act brought digital lenders under the control of the banking regulator. It allows them to once more share borrowers’ data with the CRBs. However, defaulters will have to get a 30-day notice before forwarding their names to the CRBs.

The CBK says that borrowers tapping the digital loans from the unregulated lenders grew to more than 2 million two years ago from an estimated 200,000 in 2016, highlighting their popularity. It follows that regulation is a necessary move.

With the new regulations now gazetted following the signing into law of the Central Bank Act, 2021 in December, digital lenders have been placed under the control of the banking regulator for the first time, effectively shepherded by the same regulations as banks and micro-finance institutions.

As CBK Governor Patrick Njoroge reaffirmed last month, “The Regulations are now operational, all previously unregulated DCPs are required to apply to CBK for a license within six months of the publication of the Regulations, i.e., by September 17, 2022, or cease operations.”

Featured Image Courtesy: Moolah

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