Financial Sector Developments

HIGHLIGHTS
In 2025, major trends and developments in the financial services sector are likely to include

• Tighter regulation of all non-deposit taking credit business providers following the enactment of the Business Laws Amendment Act 2024 which brings all such credit providers within the ambit of the Central Bank of Kenya.
• Increased core capital for banks and microfinances with the first increase to KES 3 billion being witnessed by December 2025.
• Clearer framework for assessing violations and imposing penalties on Banks following the passage of the Draft Banking (Penalties) Regulations, 2024.
• Enhanced FDI flow into Kenya spurred by the reduced Capital Gains tax rate of 5% for investments certified by the Nairobi International Financial Centre.
• Growth in green financing.

1. Regulation of Credit Businesses

The Business Laws Amendment Act 2024 which became effective on 27 December 2024 brings all non-deposit taking credit business providers under the regulation of the Central Bank of Kenya (CBK). It shifts the focus from regulating digital lenders as a separate category and instead integrates them under the broader framework of non-deposit taking credit providers.
(a) Non-deposit taking credit providers Credit businesses now subject to CBK’s regulation include:
(b) Buy Now-Pay Later (BNPL) arrangements
(c) Credit guarantees
(d) Pay as you go arrangements
(e) Peer to peer lending under collective investment schemes
(f) Asset financing
(g) granting of credit facilities to members of the public, with
or without interest, and either secured or unsecured

Key Implications

• The Amendment Act brings clarity around the regulation of non-deposit taking credit business providers such as BNPLs. CBK started regulating digital lenders through the CBK (Amendment) Act, 2021 but this left some creditor firms such as BNPL firms as to whether they fell under CBK purview. The amendment thus brings much needed clarity on the regulation of all credit providers.
• For consumers, these reforms promise protection from unfair pricing practices, greater transparency, and more equitable access to credit.
• For service providers, the reforms mean greater compliance costs especially for those that were previously unregulated. However, on the flip side, regulation by CBK will enhance credibility of credit providers setting them apart as compliant operators and bolstering investor trust.

2. Gradual Core Capital Increase for Banks and Microfinances by 2029

The Business Laws Amendment Act 2024 provides for the gradual increase of core capital for banks and microfinances. Presently capped at KES 1 billion, the Act will see banks increase their core capital tenfold to KES 10 billion by 2029. Additionally, by 31st December 2025, banks are expected to have a minimum core capital of KES 3 billion.

The Central Bank has adopted a phased implementation strategy to provide a manageable transition for financial institutions. The measured approach is intended to insulate and fortify banks and financial institutions against volatility by mandating greater capital buffers not only to protect banks but also to provide greater protection to consumers, fostering trust and stability in the system.

Key Implications

• The incremental elevation of core capital, while ostensibly aimed at fortification and safeguarding consumer interests may inadvertently catalyze unintended consequences. Already, the Central Bank of Kenya is projecting a specter of enforced consolidation, mergers and acquisitions looming. Additionally, it casts a shadow over the vitality of smaller banks with whispers of impending closures.
• While the Central Bank has extolled the benefits of the core capital increase, the imperative to accumulate substantial capital reserves may compel banks to adopt strategies that may ultimately burden consumers. These include the possibility of increased interest rates on loans to recoup costs and maintain profitability.
• 2025 will therefore present a multifaceted challenge is the banking industry, as far as the core capital requirements are concerned, hanging in the balance of regulatory ambition, and the reality of market forces.

3. The Draft Banking (Penalties) Regulations, 2024
In 2024, the Central Bank of Kenya (CBK) published the Draft Banking (Penalties) Regulations which are poised to replace the 1999 regulations. The desired objective of the Regulations is to provide a clearer framework for assessing violations, imposing penalties, and ensuring punishment for violations. Furthermore, it seeks to promote greater compliance with the Banking Act and Prudential Guidelines while deterring institutions and individuals from engaging in unlawful practices

Key Implications
If passed in 2025, the regulations will have the following implications:

• Introduction of new concepts: the Regulations introduce new concepts, such as the establishment of an appellate process against the adverse decisions of the CBK. This process begins with a written request to the CBK to review the decision.
• Judicial Oversight: The Regulations incorporate judicial oversight, marking a great step forward to safeguard the rights of those who are penalized and ensuring that the CBK does not act as the sole accuser, jury, and executioner. Thus, the Regulation will result into
  heightened transparency, fairness, and accountability in the efforts towards compliance and enforcement.
• Consumer Protection: The regulations will introduce penalties for financial institutions that fail to provide adequate information to customers or engage in unethical practices such as charging exorbitant fees, deceptive advertising, or failure to honour contracts.
• Prudential Standards: Penalties will be imposed for failing to meet prudential standards, such as maintaining sufficient capital reserves or adhering to liquidity requirements.
• Anti-Money Laundering and Terrorist Financing: The Regulations will penalize banks that fail to adhere to anti-money laundering (AML) and counter-terrorism financing (CTF) laws.

4. Capital Gains tax rate of 5% for investments certified by the Nairobi International Financial Centre

The Tax Laws (Amendment) Act 2024, which came into effect on 27th December 2024, introduced a reduction in Capital Gains Tax (CGT) rate from 15% to 5% for certain investment transfers. This new rate applies subject to certification by the Nairobi International Financial Centre Authority (NIFCA) that the investor has made a minimum of KES 3 billion in at least one entity incorporated or registered in Kenya within a two-year period and that the transfer of the investment has occurred after five years from the date of the initial investment.

Key Implications

• The Act replaces the previous minimum investment threshold of KES 5 billion to KES 3 billion, making it more accessible to investors. Furthermore, the lowered minimum investment threshold of is likely to create an enabling business environment for both local and international investors, driving business expansion, mergers and acquisitions, and stimulating growth across various sectors.
• It also enhances Kenya’s appeal as a destination for foreign direct investment (FDI) by lowering the tax burden on investment transfers, which could lead to increased capital inflows.
• The requirement for investments to be held for five years encourages a long-term focus from businesses therefore promoting stability in the market.

GREEN FINANCING COMES OF AGE

In a world that is increasingly seeking to address climate change and transition to sustainable development, green financing is evolving from a specialized idea and emerging area to a mainstream financial approach. These are the trends we expect to see in 2025.

1. Growth of green financial products

Financial institutions such as commercial banks, DFIs and multilateral banks are making ambitious commitments to finance the green transition and are aligning their lending portfolios accordingly. An increase in the issuance of green financial products such as sustainability linked loans, green loans and green bonds is in the horizon.

2. Rise of impact funds and sustainable investment vehicles
2024 was characterised by an increase in impact funds and sustainable investment vehicles with investors looking to fund projects that deliver environmental and social outcomes in addition to financial returns. This trend is likely to spill into 2025. SMEs working to provide clean energy, waste management, climate adaptation and sustainable agriculture solutions are well poised to benefit from these funds.

3. Technological innovations in green finance

By way of leveraging the benefits promised by big data, AI and block chain, technology will be key in facilitating access and efficiency in green finance. Kenya is well positioned to become the Sub- Sahara African hub for green fintech platforms and climate innovation.

4. Increased Private Sector involvement

Prompted by regulatory pressure and demand from consumers for greener services and products, companies are including sustainability goals in their corporate social responsibility strategies. These commitments will propel private sector driven green financing in sustainable supply chains and carbon offset schemes.

5. Regulatory Support

Kenya has demonstrated its commitment to provide a conducive policy and regulatory environment to facilitate green financing. This is for instance through the enactment of the Climate Change (Carbon Markets) Regulations 2024 which provides a framework for the conduct of carbon trading in Kenya. 2025 will be a key milestone in testing how well these regulations are being put in practice. Greenwashing has greatly undermined green financing credibility. It is expected that there will be regulatory intervention in the form of implementation of robust reporting standards and requiring third-party verification through certification.

Disclaimer:

The information provided in this article is intended for informational purposes only and should not be construed as legal advice. Don’t hesitate to get in touch with us at info@koassociates.co.ke for any queries or legal advice.