Navigating the Start-up Ecosystem in Kenya

In the wake of the fourth industrial revolution, Kenya has been lauded as the go to place, for investments in sectors like healthcare, education, agriculture, manufacturing etc. All this has been enabled due to a seemingly youthful population that is skilled enough to bring to the fore these aspirations. Kenya’s youth have put themselves on the map for contributing through training Large Language Models (LLMs) like ChatGPT to launching products.  Founders have decided to take a risk not only nurture these talents but also contribute to the country’s GDP.

However, even with the surge in technological hubs and fintechs over the years, Kenya still finds itself not able to support the full transition and integration of these technological hubs and fintechs into the Kenyan market. The most recent fintech to close shop was Bonto, which announced their exit from the Kenyan market less than 8 months after getting their license. They stated that they could not break even due to the fact that there was a lot of CBK compliance requirements which crippled them into not making bank.

2. Dissecting the Startup Bill, 2022

In an effort to support and promote the country’s start-up ecosystem (which is seemingly an industrialization gold mine that is yet fully tapped), the Kenyan legislators tabled the Startup Bill 2022 whose object is to provide a framework to encourage growth and sustainable technological development, new entrepreneurship employment, create a more favourable environment for innovation and attract Kenyan talents and capital.

Therefore, what is a Kenyan Start-up under this Bill? For a business to be recognized as a Kenyan startup, it must:

1. Have its headquarters in Kenya,
2. Be at least 51% Kenyan-owned

• Dedicates at least 15% of expenses to research and development,

1. Reinvest the profits in the early years instead of distributing them

Further, the Bill provides for the establishment of the Startup Fund whose purpose is to offer loans and grants for qualifying startups, equity financing through partnerships with investors, and training and incubation support via approved innovation hubs.

Alvin Toffler once said, “The great growling engine of change – technology”. Indeed, Kenyan market should enable the growth and sustainable technological development through such vehicle called Start-Ups and not stifle them as evolution of markets through technology is inevitable.

3. What are the compliance requirements for Start-Up & Fintech in Kenya?

The legal frameworks governing Start-ups and fintechs include:

• Central Bank of Kenya Act
• Banking Act
• Microfinance Act
• National Payment Systems Act
• Kenya Deposit Insurance Act
• Anti-Money Laundering and Counter-Terrorism Financing Act
• Data Protection Act
• Capital Markets Act

The Central Bank of Kenya (CBK) oversees fintechs that are involved in deposit taking, payment services, money remittance, digital lending, wallet services or operate a payment system in Kenya.

1. Key CBK requirements for fintech startups
   1. The National Payment Systems Act provides that fintechs need to apply for Payment Service Provider licenses as well as comply with specific authorizations.
   2. As per the Digital Credit Providers regulations, Digital Credit Providers must apply for CBK authorization as well as suppl information on business model, capital and suitability of owners and management.
   3. Startups must provide information in regard to minimum capital, fit and proper requirements for management and board, internal controls and risk management frameworks.
   4. On operational and technical standards, fintechs need to satisfy the CBK on their cybersecurity readiness, resilience and capacity to handle projected transaction volumes for payment systems and PSPs.
   5. Under AML/CFT requirements, there is an obligation to perform customer due diligence, file suspicious transaction reports and cooperate with the Financial Reporting Centre. Stronger thresholds for KYC are expected.
   6. There should be clear disclosure on fees, loan terms, interest computation and dispute resolution as part of consumer protection and transparency requirements. Consumers should at all times be protected from predatory lending. To assess customer creditworthiness, fintechs need to integrate with CBK’s Credit Reference Bureau (CRB) system.
   7. As per the Data Protection Act, fintechs are required to comply with the Act in regards to handling customer financial and personal data.

Where we come in:

At ESK Advocates LLP, we offer start-up and fintech founders actualize their dreams by facilitating and enabling them:

• Register their businesses with the Business Registration Service;
• Applying for relevant licenses from CBK or Capital Markets Authority;
• Setting up internal controls for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) compliance; and
• Ensuring data privacy and secure customer information as well as maintaining transparent communication with users.

By Sheila Nekesa, Associate Advocate