The Central Bank of Kenya (CBK) will gain sweeping powers to regulate microfinance lenders and strengthen protection for borrowers if a new Bill before Parliament becomes law.
The Microfinance Bill, 2026 seeks to repeal and replace the Microfinance Act, 2006, introducing tougher rules for microfinance banks, stricter consumer protection measures and enhanced oversight by the CBK.
Under the proposed law, all institutions offering microfinance banking services will be required to obtain a license from the CBK, with those operating without approval facing fines of up to Sh5 million, imprisonment for up to three years, or both.
The Bill also gives the CBK powers to inspect premises suspected of conducting illegal microfinance business and obtain documents and information required for investigations.
The Bill gives the CBK powers to inspect institutions, access their systems remotely, revoke licenses, remove directors and senior officers, and intervene in the management of troubled microfinance banks.
CBK on Borrower protection
The proposed law contains several measures aimed at protecting borrowers from excessive charges and unfair lending practices.
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Lenders will be required to disclose all charges, terms and conditions before issuing a loan and inform borrowers of the total cost of credit.
“The Bill states that the maximum amount recoverable from a borrower with a non-performing loan shall be ‘the principal owing when the loan becomes non-performing’ and interest ‘not exceeding the principal owing when the loan became non-performing,'” the Bill stated.
Institutions will also be required to give customers at least 30 days’ notice before changing loan terms or increasing charges.
Borrowers whose loans fall into default could also receive relief under proposed limits on the amount lenders can recover from non-performing loans.
The Microfinance Bill provides that lenders can only recover the outstanding principal, interest not exceeding the principal amount when the loan became non-performing, and recovery costs.
The legislation also requires institutions to ensure transparency, fair treatment of customers, protection of confidential information and prompt resolution of complaints.
Microfinance institutions will not be allowed to introduce new products or services, make major changes to existing products, or increase charges without prior written approval from the CBK.
The Bill also criminalizes false advertising by lenders and bars non-deposit-taking entities from accepting deposits or cash collateral from members of the public.
“The legislation makes it an offence for any entity to issue advertisements that ‘falsely represent’ that it is licensed to accept deposits or conduct microfinance business,” read part of the Bill.
Microfinance Bill Reforms
The Microfinance Bill raises the minimum capital requirements for microfinance banks, requiring institutions to maintain core capital of at least Ksh250 million within five years of the law coming into force.
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In addition, institutions will be required to maintain minimum capital and liquidity ratios prescribed by the CBK as part of efforts to strengthen financial stability in the sector.
It also introduces stricter corporate governance standards, including a requirement for institutions to have at least five directors, most of whom must be non-executive, with the board chaired by an independent non-executive director.
Significant shareholders will be barred from taking part in the day-to-day management of microfinance banks, while stricter limits will apply to loans granted to directors, staff, shareholders and their associates.
The proposed law provides penalties of up to Ksh5 million or five years in prison for violations involving insider lending and other prohibited practices.
The CBK will also be empowered to suspend dividend payments, require institutions to submit capital restoration plans, order changes in management structures and remove directors where institutions fail to meet regulatory requirements.
The regulator will further have authority to supervise groups associated with microfinance banks and require institutions to provide online access to their information systems for regulatory oversight.
According to the memorandum accompanying the Bill, the proposed law seeks to strengthen the safety and stability of the microfinance sector while enabling institutions to meet the changing needs of consumers under stronger regulatory oversight.
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