The Central Bank of Kenya has issued a regulatory approval to Fingo Africa, the first ever digital-only bank, to roll out its services in Kenya. Fingo Africa (“Fingo”) is a Neobank that has partnered with Ecobank. Both institutions are planning a Pan-African roll out which shall commence in Kenya. According to Fingo, it has raised seed capital of Kenya Shillings 1 billion (which under Kenyan Law is the minimum capital required to establish a bank) and its services are to be accessed through the ‘Fingo Africa App’, now available on Google Play Store and Apple Store. The services include account opening, withdrawals, deposits, savings, checking of bank balances, request for bank statements, monitoring of financial statements and general financial education. Fingo has no monthly charges, overdraft fees, credit checks or minimum balance required. It also has a guaranteed access period of five minutes.
Similarly, Branch Microfinance Bank (“Branch”), which acquired Century Microfinance Bank in 2022, recently communicated that they have been licensed to operate as a digital microfinance bank in Kenya. Branch has rolled out services such as digital credit provision which include savings, payment of bills and peer-to-peer funds transfer. Branch also announced that they have closed one of their three physical branches and that they will remain with only one branch, which they intend to close with time, as they work towards operating as a Neobank.
A. What is a NeoBank? A Neobank, otherwise known as a digital bank, is a bank whose services are wholly conducted through a software or digital application. The services would include account opening, withdrawals, deposits, savings, checking of bank balances, request for bank statements, monitoring of financial statements and financial education. Such banks do not require physical premises to carry out their business and offer their services.
- B. Are Neobanks Regulated in other Jurisdictions?
- 1. Nigeria
In Nigeria, there are several Neobanks such as Kuda, Vbank, Sparkle, VFD and ALAT by WEMA. They are regulated by the Central Bank of Nigeria (mandated under the Bank and Other Financial Institutions Act, 2020) which is yet to create a specific licensing regime for digital banks. Consequently, Neobanks are required to obtain either a Microfinance Bank License, a Payments Service Banks License or a Finance Company License before commencement of their operations. They are also required to set up a company at the Corporate Affairs Commission. The Neobanks are also regulated by the Nigeria Deposit Insurance Act, 2006 which requires them to have an insurance plan for deposits accepted from customers.
Despite Nigeria having several Neobanks, the requirement for them to obtain either of the above-mentioned licenses is limiting on Neobanks that intend to enter the Nigerian market and undertake business activities that require more than one license.
The regulations in Senegal are silent on Neobanks. However, according to the Global Fintech Index City Rankigs of 2020, Senegal has approximately 20 Financial Technology (“FinTech”) companies. Despite Senegal not having a sector specific regulation for FinTech, the Central Bank of Senegal has set up a Bureau de Connnaissance et de Suivi des FinTech to promote the FinTech sector and collect and/or process requests for information. As a result of the lacuna in legislation governing FinTech, the industry is scarcely regulated.
Senegal is a reflection of most African countries; which do not have sector specific regulations for Neobanks but are slowly embracing technology by implementing special vehicles to address concerns and inquiries on Neobanks.
3. Hongkong, Taiwan, Korea and Singapore
These countries have significant and stringent regulations for the licensing of digital banks and they have the following in common:
- They focus on financial inclusion- their Regulators require new market entrants to target undeserved customer segments such as macro, small and medium enterprises;
- They promote compliance with basic banking requirements- new digital banks are required to comply with the existing banking laws and regulations, prudential requirements and consumer protection rules; and
- They encourage innovation of digital distribution- digital banks are encouraged to be innovative in digital distribution of their services, for instance, to offer services through a shared network or through agents.
It is important to note that licensing of Neobanks varies from country to country, for example, in some countries such as Malaysia, Phillipines, Singapore and South Korea, the licensing is provided under a specific licensing and regulatory framework, whereas in Indonesia, the Neobanks are licensed as standard banks with specific provisions in the banking regulatory framework. In other countries such as Nigeria, China, Russia, United Kingdom and Canada, the Neobanks are licensed under the general banking and financial services regulatory framework.
- C. What is the Legal framework for Neobanks in Kenya? In Kenya, so far there is no legal framework developed specifically to regulate Neobanks. Therefore, the existing banking regulations would be applicable to Neobanks. These regulations stem from the following statutes:
- 1. The Banking Act CAP 488
The Banking Act CAP 488 does not have specific provisions on Neobanks but defines a bank as a company that carries on banking business in Kenya. This definition does not include the Central Bank of Kenya (“CBK”). The Act further defines banking business as that which entails the accepting of money on deposit repayable on demand or on expiry, from members of the public, accepting from the public of money on current account, employing of money held on deposit or on current account or any part of the money held, by lending, investment or any other manner, for the account and at the risk of the person so employing the money or such other business as the Central Bank of Kenya may prescribe.
The Act mandates CBK to issue licenses to institutions intending to transact in banking business or financial business. The Act provides a list of requirements for one to be registered as a bank in Kenya, as follows:
- A core capital of not less than 80% of total risk adjusted assets plus risk adjusted off balance sheet items, as may be determined by CBK;
- A core capital of not less than 80% of its total deposit liabilities;
- A total capital of not less than 12% of its total risk adjusted assets plus risk adjusted off balance sheet items as may be determined by CBK; and
- A core capital of at least Kshs. 1 billion. Interestingly, the capital requirement for Fingo matches this statutory minimum.
- Formal application for the license in writing, addressed to CBK;
- Moral and professional suitability of the proposed executive managers and board members responsible for the management and control the institution;
- Proposed location of the business;
- Financial history of the entity;
- Adequacy of capital structure and earning prospects;
- Convenience and needs of areas to be served;
- Service of public interest; and
- Character of management.
Despite the requirements noted above, CBK may subject applicants to certain further conditions, which must be complied with for the banking licence to be issued to them.
2. The Finance Act, 2008
The Finance Act, 2008 amended the Banking Act by raising the capital requirement for banks and mortgage finance companies from Kshs. 250 million to Kshs. 1 billion. Therefore, banks are now required to have minimum core capital of at least Kshs. 1 billion for them to be licensed by CBK.
3. The Central Bank Act Cap 491
The Act highlights some of the licensing requirements provided under the Banking Act and further emphasizes that the license shall be issued subject to such conditions as CBK may consider necessary. It also provides that CBK has the mandate to add, vary or substitute the conditions after issuance of the license, whenever it deems such changes necessary.
4. The National Payment System Act No. 39 of 2011
The Act mandates CBK to gazette a designated payment system that shall be used for purposes of sending, receiving, storing, processing payments and providing services related to payments made through any electronic system. The Act mandates banks to issue payment instructions to payment service providers who shall be required to act upon them. Some of the payment service providers include M-PESA, which was the first online payment system that was introduced in Kenya by Safaricom and Vodafone in 2007 and whose main target was the unbanked; permitting them to operate a cash wallet in the absence of a bank account.
D. The concept of digital Financial Technology (“FinTech”) vis a vis Neobanks- Financial Technology refers to mobile applications, software and other forms of technology which have been created to automate and improve the conventional forms of finance for businesses. FinTech covers digital lending, digital wealth management, blockchain and digital payments.
On the other hand, a Neobank is an unconventional type of bank which runs all its operations and renders its services solely through an online platform.
Various FinTech models have emerged since the wake of Covid-19 in 2020, for instance, the adoption of digital banking platforms such as the M-Co-op app which has been used by Co-operative Bank of Kenya to render some financial services despite there being physical bank branches which can still be accessed.
The adoption of FinTech through mobile banking applications by various banks in Kenya, such as Pesa Pap (Family Bank), KCB Mobi App (KCB Bank) and Eazzy Banking App (Equity Bank) is a progressive step towards the introduction of Neobanks in Kenya, in future. This is also a positive move on the part of CBK, which has issued the approvals for mobile banking.
- E. Recommendations on licensing of Neobanks in Kenya
In Kenya, since there are no specific regulations on Neobanks, it is imperative to note that such banks’ operations should not mimic those of traditional banks especially in light of the fact that they are digital in nature. Therefore, the license issued to Neobanks would need to be given exemptions from adherence to certain requirements, such as:
- The requirement to have physical premises under CBL Prudential Guideline CBK/PG/01- will be redundant due to the nature of the bank; and
- The requirement to display their license at their physical premises- they would be required to display the same on the website since Neobanks are solely run online.
Further, in order to avert possible risks associated with any shortcomings related to liquidity and loss of customer confidence, CBK ought to discourage partnerships between banks and proposed Neobanks (which may result in shadowing of Neobank’s reputation and trigger loses in case of non- compliance or compromise of platforms since the Neobank would not have control rights) and in light of the current technological trends, CBK should prepare and publish draft regulations with respect to Neobanks.
It is noteworthy that CBK has taken steps in the recognition of mobile banking which has largely contributed to the growth of the banking sector. This has been made successful through the publication of the E- Money Regulations, 2013 by CBK. The regulations require a proposed E-money issuer to have a core capital of Kshs. 60 million for them to be authorized by the Central Bank of Kenya, among other requirements.
F. What are the Advantages and Challenges of Neobanks?
Neobanks, just like conventional banks, have their advantages and challenges as highlighted below:
- Convenience- financial transactions such as deposit or withdrawal of funds are done at the convenience of the user of the digital channel who has an account, at anytime, anywhere in the world;
- Expeditious- bank account opening and other transactions are expedited as long as the user has a stable internet access; and
- Lower costs- Neobanks operate at lower costs considering the fact that they do not operate in the same way as traditional banks because by their nature, they are not required to have physical branches.
- For one to operate an account in a Neobank, they should be computer literate and familiar with online services. As such, Neobanks are not convenient for everyone especially persons who are not computer literate;
- Lack of face-to-face contact, support may be frustrating especially in instances where downtime is experienced; and
- Can be insecure where the software does not have proper security features hence subjected to hacking, virus attacks, online user ID theft and fraudulent transactions which may jeopardize the security of the user’s funds.
The advent of Neobanking is significant in the financial market particularly in light of the current technological trends. The move by CBK to license Fingo and Branch Microfinance Bank is a positive market decision that will ensure that with time, all Kenyans will receive banking services at their convenience, and enhance the country’s status in the global financial market. With sound policy and regulatory consideration, Neobanks will increase efficiency in the banking sector and attract more global multi- currency banks in Kenya.
Even though the licensing requirements for both commercial banks and microfinance banks are built on prudence, the difference in both is that commercial banks are based on utilizing traditional banking practices whereas microfinance banks are anchored on diverse banking practices. However, these practices cannot be adopted wholesome without curtailing and diluting the benefits of technology which is at the core of NeoBanking. In Kenya, there are no specific regulations, therefore, such bank operations should not mimic those of a conventional bank. It is imperative that CBK considers formulating regulations that are specific to and promote Neobanking. There is also need to amend the existing Acts to expressly provide for such banks and ascertain the status of already licensed traditional banks (commercial or microfinance) that have opted to take the digital route and have in fact reduced the number of branches and banking halls. The reduction of bank branches and banking halls is considered a step towards full migration to Neobanking.
Godwin Wangong’u/ Senior Partner
Grace Andati/ Associate
19th April, 2023
This article is intended for general knowledge only. It does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates.
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