The Central Bank of Kenya has released a proposal for the comprehensive review and overhaul of the microfinance and Deposit Taking Microfinance Institutions' regulatory and supervisory framework. CBK says the proposals have been formed in consultation with practitioners and players over the three year period of operationalisation of the Microfinance Act, 2006.

The policy brief released last week proposes a number of critical areas that need to be interrogated within the Act and Regulations. These include;

1. High Requirements for Licencing DTMs: The proposal is to review current licensing conditions while adopting a risk-based approach to licensing. According to CBK, the Association of Microfinance Institutions of Kenya (AMFI) membership is close to 50. Only 6 DTMs out of those have been granted licence to engage in deposit taking microfinance business. One of the reasons for the low uptake of regulated DTMs is given as steep costs incurred while transforming from credit only to DTM business. The proposal is to review the current licensing conditions while adopting a risk-based approach to licensing, which CBK says will reduce transformation costs.

2) Participation of DTMs in the national payment system: CBK has proposed that DTMs should be allowed to operate current accounts to boost their deposit mobilization capacity and participate in the national payment system to increase their range of financial service provision. MFIs would not be allowed to operate current accounts, accept third party cheques, trade in foreign currencies or finance foreign trade as these services were deemed not critical for the ordinary Kenyan these institutions were expected to serve. But that has since changed as MFIs are playing more critical roles for their clients.

3) Credit information sharing mechanism: Following amendment to the Central Bank, Banking and Microfinance Acts through the Finance Act, 2012, Credit Reference Bureau Regulations are to be revised for DTMs to be included in the credit information sharing mechanism currently in place for banks. This will help lenders establish the repaying ability of their borrowers to avoid loaning money to borrowers who are not creditworthy.

Some of the other regulations proposed include regulation of credit-only microfinance institutions and self-regulation, branch network set-up cost and places of business, and Consumer protection protection frameworks.