How new laws threaten banks, fintechs in innovation game


Kenya’s financial sector is set for an unsettling future arising from a new regulatory environment that has tightened the operating space.

This is likely to test the versatility of the emerging financial technology (fintech) frontier that has been touted as the future of financial services. The Finance Act 2018 and the proposed Financial Conduct Bill, 2018 will redefine the financial services sector, forcing financial institutions and telcos to rethink their game to remain competitive, analysts say.

The Nairobi Business Monthly takes a look into the future of the financial services sector under the new operating regime.   

The coming into force of the Finance Act 2018 brought with it several provisions that have changed the way banks and other financial institutions have previously interacted with their customers, making transactions more expensive.

First, the Act amended the Excise Duty Act, 2015 to introduce excise duty on telephone and Internet data services at the rate of 15%.

“The Finance Act, however does not define the scope of internet data services and in our view the term ‘internet data services’ is broad and will include internet data services provided by internet service providers as well as internet data services provided by telecommunication companies” said PwC in a research note.

The Act has also increased excise duty charged for money transfer by banks, money transfer agencies and other financial services from 10% to 20%. This increase in is aimed at replacing the robin-hood tax introduced by the Finance Act, 2017 which was considered more expensive and complicated to implement.

Thirdly, excise duty on fees charged for money transfer services by cellular phone service providers was raised from 10% to 12% while duty on other fees charged by financial institutions edged up from 10% to 20%.

The changes are expected to disrupt the mobile phone revolution, which has seen banking and financial services shift dramatically to the gadgets.

“Credit is now a transactional utility to a mass market in Kenya largely because of the developments in mobile payments with an efficient money distribution infrastructure – mobile money, but also the prevalence of mobile technology and availability of data online and real time. Getting a loan within seconds directly applied and disbursed to your phone is already a reality” said Edward Ndichu, the managing director, Opera for Africa.

A recent research study by CreditInfo revealed that 98% of these loans have been offered by Banks with over 12 million contracts to over three million customers. A recent study by FSD Kenya sighted the major reasons by customers for accessing digital credit as being for ‘meeting day to day ordinary household needs’ and ‘business purposes’, while only 31% of digital borrowers have ever tried mobile betting.

On October 17, Safaricom said it has increased the price of voice calls, data and SMS, passing on to consumers the 15% excise duty tax on telephone and internet services. The firm raised the cost of calls by 30 cents, and SMS by 10 cents, joining Zuku and Jamii Telecommunications (JTL) in implementing the price increase on their data and call products. The mobile phone service provider also reviewed prices for mobile data bundles, fibre to the building and fibre to the home.

Mobile money services has grown exponentially over the last few years. The Government’s appetite for taxation of the mobile transfer services, which has effectively increased the cost of the services, will dampen the gains made in growing financial inclusion. While the excise duty on money transfer services by banks remains at 10%, the banks and cellular phone service providers have recently partnered to provide end to end products for their customers.

Financial Markets Conduct Bill, 2018

But even before the implications of the Act are fully felt, the sector has been slapped with new draft regulations under the Financial Markets Conduct Bill, 2018.

The proposed law crafted mid this year is in response to what Treasury views as a need to create a more effective financial consumer protection environment in relation to the conduct of providers of financial products and services. It is also envisaged to make credit more accessible while simultaneously supporting financial innovation and competition.

Just how could the Financial Markets Conduct Bill, 2018 affect the financial services sector?

First, providers of financial products and services to retail financial customers will be required to obtain a Financial Conduct License that will be issued by the Financial Markets Conduct Authority, a new body to be formed to regulate all players in the financial sector in Kenya and to curb irresponsible financial market practices. Failure to do so attracts a fine for a first offence not exceeding Sh5 million or imprisonment for 2 years, and for a second or subsequent offence a fine not exceeding Sh10 million or imprisonment for 5 years.

Secondly, the Bill proposes stiff penalties to financial institutions over unfair business practices. For example, banks will be charged up to Sh10 million for soliciting applications for credit or soliciting for an increase of a credit limit through unsolicited contact with customers and outside certain hours of day to be specified by subsequent regulations.

Analysts reckon that financial service providers will have to exercise added caution in their marketing practices and general business conduct to ensure compliance with the new provisions, if the Bill becomes law.

“Having strict and stringent regulations would stifle the sector. There ought to be a sober balance between regulating the sector as a means of providing checks and balances, and creating a conducive environment by avoiding rigid legislation” said Cathy Mputhia, an advocate in a commentary in a local daily.

“On the other hand, having strict and rigid regulations to cater for technology and innovation would be very stifling and would serve the reverse effect. The law is meant to provide a conducive environment for innovators,” she added.

While it remains to be seen whether this Bill will be passed in its current form, it has already elicited varying concerns and triggered a tussle between the National Treasury and the Central Bank of Kenya (CBK), the financial sector regulator. On May 29 the CBK Governor Dr Patrick Njoroge issued a statement voicing concern that the Bill has the potential to create a conflict between the current functions of the CBK as the financial regulator and the anticipated role of the Authority.

“In sum, this is financial sector equivalent of being asked to trade in your well-serviced SUV for a souped-up Subaru. It may have flashy lights, stabiliser at the back, noisy exhaust and racing strength but it is still a Subaru,” said the Governor. “It is time for action. Make no mistakes, CBK is under attack. These are summons to act with courage to defend and strengthen it, reviving our hope in the common vision of a modern CBK at the heart of a vibrant financial system.”  

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