New Central Bank of Kenya (CBK) rules have triggered anxiety among non-deposit-taking credit providers (NDTCPs), with analysts raising concerns about non-clarity in the set order of distributing proceeds from loans repaid by borrowers.
The regulations published by CBK Governor Kamau Thugge suggested that funds from loan repayments to NDTCPs will first offset the principal amount, then fees and charges, and finally interest.
‘The repayment amount referred to in paragraph (1) shall be allocated in the following manner-(a) settle any due principal payment; (b) any outstanding fees and charges on the loan; and (c) interest due on the loan,’ the CBK regulations said.
Analysts, however, pointed out that the new CBK rules reverse the sequential payment hierarchy traditionally used to distribute recovered loans.
‘This reverses the waterfall in Loan Market Association-based and syndicated facilities, which applies payments to agency costs, then interest and fees, then principal,’ analysts at law firm Bowmans said in a commentary and urged the CBK to address the concern.
A sequential payment hierarchy, commonly known as a payment waterfall, prioritises the payment of agency costs-such as trustee fees, servicer fees, and administrative expenses-at the very top of the structure to guarantee the operational survival and basic compliance of the financial vehicle.
A sequential payment hierarchy prioritises interest and fees over the due principal to protect the lender’s ongoing yield and cover immediate servicing costs.
The experts also raised concerns about the new CBK regulations on corporate, cross-border and wholesale lenders.
‘There are no carve-outs for foreign lenders, DFIs (Development Finance Institutions), wholesale lenders, representative offices or intra-group loans, and no ‘sophisticated borrower’ threshold. It is unclear whether lending to a single corporate is lending to ‘a section of’ the public,’ they said.
The NDTCP regulations follow amendments to the CBK Act (Cap 491) vide the Business Laws (Amendment) Act, 2024. The amendments are aimed at, among others, clarifying and widening the scope of operations of NDTCPs, formerly Digital Credit Providers.
The new regulations place big emphasis on consumer protection, with the CBK setting tough terms on key areas such as credit terms and handling of personal information.
‘A non-deposit-taking credit provider shall formulate a credit policy consistent with the Act… The credit policy shall be aligned to the size of the non-deposit-taking credit provider, and the nature and complexity of the products offered by the non-deposit-taking credit provider,’ the CBK said.
‘A non-deposit-taking credit provider shall not introduce a new non-deposit-taking credit product to the market or vary the features of an existing product, including the interest rates, without the prior written approval of the Bank.’
CBK said that NDTCPs proposing to change product features or interest rates will have to justify the variations and notify their customers of the planned changes at least 30 days before they take effect.
The CBK said the credit firms will be required to provide a unique identifying account number issued by a mobile money operator to be used for disbursements and repayments of loans; the app-based platforms to be launched; and the name of the bank and number of accounts to be operated.
‘With respect to app-based and other digital platforms, a non-deposit-taking credit provider shall make provision for unsubscribing or opting out from the service, including from receiving marketing messages upon full repayment of the loan and from receiving marketing and promotional communication,’ the regulator said.
The CBK said that subject to its credit policy, a non-deposit-taking credit provider may restructure a loan in terms of instalment amount, payment period or other terms upon receipt of a request from a borrower or on prior notification to the customer.
‘A non-deposit-taking credit provider shall be limited in what it may recover from a customer with respect to a non-performing loan to the maximum amount under paragraph (2). Limit on interest recoverable from non-performing loans,’ the bank said.