Why market should lead policy

Before the capping of interest rates credit was available but not affordable but after capping of the rates, loans are not there because government borrows too much and banks are colluding to squeeze credit and bring government to their side

President Uhuru Kenyatta signing the Interest Rates Bill into law.


Regulatory sandboxes, is when the government or essentially the Capital Markets Authority (CMA) stays aloof to allow experimentation then later formulate policy to guide them. The gist of this is to give a safe legal status and space for ingenuity to investors and developers to unlock their unique financial innovations with specific bias to Kenyan consumers. It is greatly inspired by the global success of M-Pesa where Kenya remains a trailblazer in mobile money innovation.

Fintech innovation tends to align with the Capital Market’s 10-year Master Plan that seeks to stimulate innovation, broaden
products while deepening market
participation and liquidity to drive economic development while making Nairobi a financial hub not only on the continent but world at large. Fintech startups are allowed to test new products and a number of actual users allowed in a simulated environment.

This allows the Fintech founders time to build and test ideas rather than spending their time navigating complex financial services regulations. Focusing on regulatory compliance is not only time consuming but also eats up the capital before establishing whether the innovation will be a success or not. This however should not be viewed as a means to avoid existing laws and regulations.

The move by the Central Bank of Kenya (CBK) on capping of interest rates is a perfect example where policy by technocrats failed. Policy is best allowed to follow market and not the other way round if we want to allow for innovation to thrive. Interest capping is a provision in adjustable rate mortgages that limits how much an interest rate can increase.

In April 2018, President Kenyatta said his government would scrap laws that cap interest rates after access to credit for small and medium enterprises dried up as a consequence. This, however, is debatable with many financial observers noting that banks were more willing to do business with government rather than individuals.

A financial analyst recently noted that “Before the capping of interest rates, credit was available but not affordable but after capping of the interest rates, loans are not there because government borrows too much and banks are colluding to squeeze credit and bring government to their side,” observed a financial analyst who did not want to be named due to the sensitivity of the matter given where he works, adding that this is tantamount to blackmail and economic sabotage by banks to force through amendments to the law.

CBK Governor Dr Patrick Njoroge, who was opposed to the caps from the word go, favoring self regulation instead, has too thrown his weight behind the repeal forces saying that for the country to realize economic growth the rate capping must be amended.

Kenya had capped commercial lending rates in September 2016 at 4 percentage points above the central bank’s benchmark rate that currently stands at 9.5 percent.

To limit the cost of borrowing for businesses and individuals, government in September 2016 capped commercial lending rates at four percentage points above the Central Bank’s benchmark rate, which currently stands at 9.5%. Much has been written and said about the capping of interest rates but what remains the fact is that credit to SMEs and individuals has been at an all time low. The lesson to draw from capping of interest rates is that we let policy lead the market. 

Noteworthy is fact that fintech has been more pronounced in sectors of finance like the banking industry and the insurance industry.

In a survey by Digital Frontiers Institute of 400 respondents in 69 companies from 10 African nations, Kenya was found to be the most attractive destination for Fintech Companies with executives in Kenya earning an annual basic salary of Sh24 million, compared to KSh22m in Nigeria, KSh18.3m in Tanzania and KSh15.8m in South Africa. Such high emoluments show the stiff competition in the nations to attract and retain the skilled personnel needed.

Australian Securities and Investment Commission (ASIC) introduced Fintech sandbox in 2016 that enabled eligible firms to test services in a structured environment. In some of the feedback ASIC received in 2018, ASIC Commissioner John Price noted that there were instances where interested Fintechs discovered that they were unable to make use of the Fintech licensing exemption. Overall, it was found that businesses had been encouraged to come forward and consider their options in the created environment.

ASIC notes that with their existing Fintech licensing exemptions, businesses are allowed up to 12 months with up to 100 retail clients as long as they meet a number of consumer protection conditions and notify ASIC before commencement of business. Currently, four Fintech businesses have used this licensing exemption and are operational while a dozen others have shown interest of using the Fintech licensing exemption.

The use of regulatory sandboxes across the globe portrays willingness by governments to take a progressive and proactive approach towards the idea of fintech innovation. In addition, countries, Kenya included, are adding blockchain technology in the evolution of financial systems. As new ideas from people of varying cultures and backgrounds keep getting tested and perfected, the world’s financial landscape is placed to blossom.

While models for regulatory sandboxes world over vary. Hong Kong in a bid to establish dominance as a financial hub has, has for instance, broken from the trend by other nations to only offer them to established banks seeking to explore distributed ledger technology and fintech solutions while prohibiting startups from trying. Other countries like Malaysia gave preference to startups to maximize innovation.

The Canadian Securities Administration on the other hand has not only included cryptocurrency, it also seeks utilization of artificial intelligence for trading, regulatory technology and online investment platforms.

Some of the successes of the regulatory sandboxes include the fact that both time and cost have been reduced and it has allowed new innovative ideas get into the market with limited restrictions. There is also the fact that a number of fintechs have been able to access funding.

Kenya, too, must not be left behind and recently the taskforce to look at blockchain technology is a welcome move and in the right direction. Yet, the government must remain on top of things to ensure consumers are protected from exploitation, as this can be a window to allow illegal businesses to spring up if not keenly regulated and monitored.