The Risks Associated With Digital Financial Services

The Digitalization of Financial Services is an undeniable force shaping the future of financial platforms. The ability to perform transactions, check balances, access loans and invest on an online platform has revolutionized the way in which we interact with money.

The Paramount concern surrounding digital financial services is the vulnerability of the user data to Cyber threats. The volume of sensitive information traversing the digital landscape has increased making users susceptible to identity theft, fraud and other malicious activities. Despite the rapid technological innovations, the Kenyan legal and regulatory framework has not responded to the gaps in respective legislation.

The regulations for Financial Services in Kenya are contained in different statutes which include the Banking Act, the Prudential Guidelines for the Institutions Licensed Under the Banking Act, Money Remittance Regulations 2013, the National Payment Systems Act, National Payment Systems Regulations, Kenya Information Communications Act and the regulations thereunder amongst several other statutes.

Varied aspects of the digital financial services are therefore regulated separately by different regulators such as the CBK and the Communications Authority of Kenya (CAK). This fragmented nature of the regulatory framework means that entities seeking to play in this space have to scour through different statutes, regulations and circulars to know their obligations.

Decisions driven by different regulators therefore leads to lack of coherence in consumer protection and market oversight.

In 2021, Parliament enacted the Central Bank Amendment Act 2021 giving CBK powers to regulate digital lenders despite these actors having been in the market for several years. The Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 requires the digital lenders to implement consumer protection measures and obtain CBK licensing.

The digital credit providers regulations seek to regulate providers who are lending or borrowing through digital channels. There is an aspect of ambiguity in the regulations on whether providers who use manual or physical documents until the disbursement stage which is done through mobile money or bank transfer or cheques are covered by the regulations.

Though the Digital Lenders regulatory framework has come into force, there is a need for continued enhancement.

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