Why Buy Now Pay Later (BNPL) Companies will soon need a Licence

Buy Now Pay Later (BNPL) refers to a short-term type of financing that allows consumers to make purchases and pay for them over time, it also sometimes includes some form of direct asset financing (loan) option. In Kenya, some examples of these models include M-kopa, Lipa Later, and Aspira. It also has renditions of it through Save Now Buy Later [SNBL) solutions run by different companies.

Regulatory-wise, this model has remained unregulated even as some, like Lipa Later, opted to register as Digital Credit Providers. A digital credit provider means any person or business entity that provides loan services through the internet, mobile services, computer devices, applications, or other digital systems as may be prescribed by the Central Bank of Kenya (CBK).

This regulatory gap has been a significant concern, exposing consumers to potential unfair trade practices. In light of this, the Business Amendment Bill(2024) was introduced to regulate the industry. The Bill is a build-up to the case of Mogo Auto Limited v Otianga (Civil Appeal E036 of 2024) [2024] KEHC 13055 (KLR) (22 October 2024) (Judgment) where Mogo was fined Ksh. 10,851,473.20 for misleading and outrageous loan terms.

The Bill, seeks to delete the terms digital channel, digital credit, digital credit provider and digital credit business under Section 2 of the CBK Act and to replace it with ‘credit provider’ and ‘buy now pay later’ which are broader and cover all sorts of non-deposit taking credit providers.

As per the amendments, credit providers encompass entities offering both secured and unsecured loans, asset financing (whether directly or indirectly through a financier), credit guarantees, and peer-to-peer lending under collective investment schemes regulated by the Capital Markets Authority.

BNPL agreements, on the other hand, are defined as agreements where consumers purchase goods or assets and pay in instalments with or without interest, excluding hire purchase agreements governed by the Hire Purchase Act.

In this regard, the government has also proposed changes to another law, the Movable Property Security Rights Act, to grant CBK oversight over hire purchase costs, allowing the Central Bank to set interest rates for these agreements though the hire purchase registry will remain under the Business Registration Service.

Currently, under the Central Bank (Amendment) Act of 2021, CBK is tasked with licensing Digital Credit Providers (DCPs), approving their digital channels, regulating their pricing, and suspending or revoking licenses. In this sense, the literal interpretation would lead to the assumption that any business that does not offer credit through digital channels isn’t a digital channel provider.

However, the effect of CBK’s interpretation was to bring every unregulated lender under it through licensing, regulation, and supervision. While this has been the case, the proposed amendments will expand CBK’s powers effectively by amending Section 33R to include the regulation and supervision of all non-deposit-taking credit providers.

Notably, it will also have the power to issue an enforceable code of conduct regulating non-deposit-taking credit providers and require all the non-deposit-taking credit providers to get a license.

The proposed regulations are a game-changer for the credit landscape in Kenya. By standardizing practices, the amendments aim to create a fairer, customer-centric ecosystem. For BNPL providers, acquiring a license from the CBK will be essential to ensure compliance as consumers will increasingly only want to deal with regulated entities.

The writer is a lawyer who specialises in offering legal services to technology companies, you can contact him through [email protected]