CBK to Regulate Digital Lenders: The Central Bank of Kenya (Amendment) Act, 2021 Passed Into Law

Background to the Legislation

The Central Bank of Kenya (Amendment) Act, 2021 (hereinafter, the Act) is the latest development in the quickly evolving digital lending space in Kenya. Over the past decade or so, Kenya has achieved significant financial inclusion thanks to increased penetration into the market brought about by advances such as mobile banking, digital lending and mobile wallets.

Digital lending has risen steeply due to its convenience and accessibility. Owing to its ever-expanding market and use, it has become necessary to tighten the regulation around digital lending, so as to make the same less susceptible to abuse and/or unethical dealings. It is against the foregoing background that the Act was passed into law by the President on 7th December 2021.

Principal objectives of the Act 

A. Regulation of Digital Lenders and Consumers by the CBK

The amendment brings digital lenders and borrowers under the regulatory ambit of the Central Bank of Kenya (“CBK). The digital lending marketplace has been unregulated or rather self-regulating since its inception which led to the emergence of unscrupulous digital lenders who sometimes employed unethical or illegal methods of debt collection such as debt shaming, predatory lending, charging exorbitant interest rates, illegal sharing of defaulters’ data among others. The Act now empowers CBK to regulate all the digital credit providers to curb the foregoing.

Among others, CBK shall license digital credit providers; determine capital adequacy requirements for digital credit providers; determine the minimum liquidity requirements for digital credit providers; approve digital channels and business models through which digital credit businesses may be conducted; supervise digital credit providers; circumstances permitting-suspend or revoke any license; and direct or require such changes as it may consider necessary.

B. Registration of Existing Digital Lenders within Six (6) Months

The Act mandates CBK to publish the regulations to fast-track the carrying into effect of the new amendments, within three (3) months’ time.

Since the registration procedures will be contained in the yet to be published regulations, the implication is that registration will commence in earnest, once the regulations have been published. Hence, existing digital credit providers have about three (3) months to ensure that they register their businesses, or risk falling afoul of the Act with attendant penalty.

C. Reporting Obligations & Other Requirements for Digital Lenders

Digital credit businesses handle billions of shillings, control or process a significant amount of borrowers’ personal data, and deal with a huge body of clientele. As such, they are required to comply with the existing legal framework on the management and processing of personal data that is compliant with Data Protection Act, 2019. This is especially important because some digital lenders have been adversely cited for unlawful sharing of personal data of their customers.

In the same vein, digital lenders will be required to comply with the credit information sharing. However, it is unclear yet if they will be required to submit customer credit information reports to Credit Reference Bureaus (“CRBs”) and if the CRBs will, in turn, supply them with individual credit information reports. We note to keep you apprised should CBK publish the regulations to operationalize these amendments.

D. Penalties for Non-compliance

The Act prohibits any person from engaging in the digital credit business without a license and in this regard provides a penalty of imprisonment for a term not exceeding three (3) years or a fine not exceeding Kenya Shillings five million (KES 5,000,000) or to both.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken or be construed as a legal opinion. If you have any queries or need any clarifications as to how any aspect of the amendments might affect you, please do not hesitate to contact John Mbaluto, FCIArb, Deputy Managing Partner (john@oraro.co.ke), Hellen Mwongeli, Associate (hellen@oraro.co.ke) or your usual contact at our firm.

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In the locus classicus case of Republic v Commissioner of Lands ex parte Hotel Kunste (1997) eKLR, the Kenyan Court of Appeal described judicial review as proceedings sui generis that are neither civil nor criminal in nature and pronounced that judicial review is concerned only with the decision-making process and not the merits of the decision itself, harking back with due homage to the time-hallowed words of Lord Hailsham of St. Marylebone in Chief Constable of the North Wales Police v Evans (1982) 1WLR 1155:

“The purpose of judicial review is to ensure that the individual receives fair treatment, and not to ensure that the authority, after according fair treatment, reaches on a matter which it is authorised by law to decide for itself a conclusion which is correct in the eyes of the Court.”

The foregoing encapsulates what may be referred to as “the traditional approach to judicial review”. This article discusses the apparent paradigm shift in the approach to judicial review following the promulgation of the Constitution of Kenya, 2010 and the subsequent enactment of the Fair Administrative Action Act, 2013.

The Traditional Approach

Under the traditional approach to judicial review, an applicant was restricted to demonstrating that the administrative decision or act complained of was tainted with illegality, irrationality, or procedural impropriety.

In the case of Keroche Industries Limited v Kenya Revenue Authority & 5 Others (2007) eKLR, the Court expounded on the foregoing by setting out the description of illegality, irrationality, and impropriety. Illegality happens when the decision-making body commits acts that are ultra vires, in other words, outside the scope of the powers granted by law, resulting in an error of law. Irrationality manifests itself when there is evidence of gross unreasonableness in arriving at the decision, such that no reasonable authority exercising its right properly would have arrived at such a decision. Procedural impropriety comes in when there is a failure to act fairly by among others, failure to uphold the principles of natural justice.

Kenyan Courts have hitherto consistently upheld and applied the traditional approach, even after the promulgation of the Constitution of Kenya, 2010. For example, in the case of Republic v Inspector General of Police & another ex parte Patrick Macharia Nderitu (2015) eKLR, the Court was emphatic that judicial review was a common law remedy, applicable in Kenya by virtue of the Law Reform Act (Cap. 26) Laws of Kenya and was only concerned with the process followed to arrive at a decision.

A Move to the Merits

All was seemingly clear, then in came the Constitution of Kenya, 2010. Article 23 (3) thereof provides for the Orders of judicial review as one of the available remedies in relation to the enforcement of the bill of rights. It is noteworthy that the Constitution of Kenya, 2010 contains a comprehensive bill of rights which includes the right to fair administrative action as espoused under Article 47. Resultantly, the orders of judicial review have become available not only within the previous confines of the Law Reform Act and Order 53 of the Civil Procedure Rules, 2010 but also in instances of breach of any of the fundamental rights and freedoms conferred under the Constitution.

To give effect to the right to fair administrative action under Article 47 of the Constitution, Parliament enacted the Fair Administrative Action Act, 2015 (FAAA). The FAAA has widened the scope of judicial review in Kenya by going beyond the traditional approach restricted to procedural considerations which was previously the focus of judicial review, to now include a consideration of the merits of administration action or decision forming the subject of the judicial review proceedings.

Though cautiously, there is an evolution towards the application of the “hard look doctrine” in judicial review which permits Courts to also consider the merits of a case as opposed to the traditional process-only inquiry. This paradigm shift is evinced by the jurisprudence emanating from Kenyan Courts though laced with some controversy or inconsistency with some Courts upholding the traditional process-only approach, with others embracing the merit based approached flowing from the Constitution of Kenya, 2010 and the FAAA.

Which Way to Go?

In the case Trusted Society of Human Rights Alliance v Attorney General & 2 others (2012) eKLR, the issue arose as to whether in reviewing the procedure of appointment of Mumo Matemu as the head of the Ethics and Anti-Corruption Commission, the High Court could, in addition to reviewing the procedure followed by the appointing authority, also review the merit of the decision.

The High Court held that it could properly review both the procedures of the appointment as well as the legality of the appointment itself – including determining whether the appointee met the constitutional threshold for appointment to the position. Simply put, the High Court was of the view that it had powers to delve into the merits of the decision forming the subject of the judicial review. However, on appeal, the Court of Appeal faulted the High Court for having misapplied the doctrine of rationality and reasonableness by reviewing the merits of the decision which was a great affront to the doctrine of separation of powers. The Court of Appeal was of the considered view that the High Court ought to have restricted itself to the process that was followed in arriving at the appointment.

Subsequently, in the case of Suchan Investment Ltd vs. Ministry of Natural Heritage & Culture & 3 Others (2016) eKLR, the Court of Appeal changed tact and held that Article 47 of the Constitution of Kenya 2010, as read with the FAAA, reveals the implicit shift of judicial review to include aspects of merit review of administrative action. The Court of Appeal attributed the change in landscape to the grounds for judicial review identified under section 7 (2) of the FAAA such as rationality of the decision, scope of authority, etc which invited aspects of merit review. However, the Court of Appeal hastened to clarify that there is no power for the reviewing Court to substitute the decision of the administrator with its own. Indeed, section 11 (1) (e) and (h) of the FAAA preserve the decision-making power on merits to the administrator or authority, by giving the Courts the power to remit the matter back to the decision-making body.

The Shift Confirmed

More recently, the Court of Appeal entrenched the paradigm shift from the traditional approach to merit review in the case of Judicial Service Commission & another v Lucy Muthoni Njora (2021) eKLR. In this case, the Deputy Registrar of the Supreme Court received an interdiction prohibiting her from performing her duties as Deputy Registrar pending her appearance before the relevant Committee of the Judicial Service Commission (JSC). Following the disciplinary proceedings, the Deputy Registrar was dismissed from employment by the JSC. Aggrieved by the decision, she moved to the Employment and Labour Relations Court alleging violation of her constitutional right to a fair administrative action. The Court found in the Deputy Registrar’s favour prompting an Appeal to the Court of Appeal. One of the grounds of appeal was that the Court erred by usurping the JSC’s disciplinary mandate and interfering with its human resource functions, and that the Court had thereby ventured into a merit-based review of the JSC’s decision to dismiss the Deputy Registrar.

In determining this issue, the Court of Appeal pointed out that even the traditional process-only approach inevitably contained an element of merit analysis. It would therefore be unrealistic for a Court to engage itself only with a formalistic approach while excluding the merits since it was only from merits that a Court could have a meaningful engagement with the question of reasonableness and fairness of the decision. The Court of Appeal, (as per Kiage JA) was emphatic that there has been a seismic shift towards a merit-based approach, and held as follows:

“We emphatically find and hold that there is nothing doctrinally or jurisprudentially amiss or erroneous in a judge’s adoption of a merit review in judicial review proceedings. To the contrary, the error would lie in a failure to do so, out of a misconception that judicial review is limited to a dry or formalistic examination of the process while strenuously and artificially avoiding merit. That path only leads to intolerable superficiality. Being of that mind, on the critical complaint that the learned Judge misconstrued the nature of the complaint, and even violated jurisdictional bounds by engaging in a merit-review, I find that the learned Judge did not err. I answer the first issue in the negative.”

Upshot

The decision by the Court of Appeal in Judicial Service Commission & another v Lucy Muthoni Njora has confirmed the paradigm shift from the traditional process-only approach in judicial review to a merit-based review. Consequently, decisions of entities exercising administrative functions will now be subjected to greater scrutiny, including the merits or demerits thereof. Such bodies should thus be concerned that their decisions are up to scratch in terms of passing both procedural as well as substantive muster.

Changing times are indeed firmly upon us.

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Like many other developing countries, Kenya requires low-cost electricity to boost economic growth. Various key sectors would benefit from cheaper electricity. For example, the manufacturing sector would be able to offer competitively priced goods in the global export markets, whilst large infrastructure projects would benefit from increasingly attractive returns. Above this, there has been widespread concern about the high cost of electricity in Kenya. This is amongst one of the factors that prompted the President, H. E. Hon. Uhuru Kenyatta, to appoint a taskforce to review Power Purchase Agreements (PPAs) on 29th March 2021.

This article will explore one of the means of procuring competitively priced generation tariffs, being renewable energy auctions. The adoption of renewable energy auctions has increased significantly across the globe as more countries look to this method as being effective in the price discovery of power projects. With a global shift towards the use of renewable energy, countries are procuring renewable energy through auctions as a means of leveraging on the market-based prices and competitive nature of auctions. Auctions envisage a competitive bidding process for the procurement of renewable energy, where bidders are evaluated solely on a set criterion determined by the government.

Since 2008, Kenya has procured its renewable energy under the Feed in Tariffs Policy on Wind, Biomass, Small-Hydro, Geothermal, Biogas and Solar Resource Generated Electricity, which was last revised in 2012 (2012 FiT Policy). To power project developers and their investors, the 2012 FiT Policy is ideal because of the tariff guarantees, which allow power generators to sell the generated electricity at pre-determined tariffs under standardized PPAs for a specified period.

However, while the 2012 FiT policy offers lower pre-determined tariffs, investors have on numerous occasions made submissions for generation tariffs higher than those contemplated under the 2012 FiT Policy. Following this trend, there was a proposal to review the 2012 FiT Policy with a view to maintain the lower pre-determined tariffs and introduce renewable energy auctions to handle the submissions for higher generation tariffs. Additionally, in 2016, the Ministry of Energy undertook a feasibility study to explore the practicality of introducing renewable energy auctions. Renewable energy auctions were first contemplated in the Energy Act, 2019 (the Energy Act) where under section 119 (2), the Energy and Petroleum Regulatory Authority can through a fair, open, and competitive process issue a generation licence.

In January 2021, pursuant to this provision of the Energy Act, the Ministry of Energy released the draft Renewable Energy Auctions Policy (Auctions Policy). Once approved, the Auctions Policy will ensure that renewable energy is procured competitively and in line with the Least Cost Power Development Plan (LCPDP)/ Integrated National Energy Plan (INEP). The Auctions Policy is yet to be approved by the Ministry of Energy and its implementation will be dependent on the recommendations of the Presidential Taskforce on the Review of PPAs.

Scope of the Auctions Policy

If approved by the Ministry of Energy, the Auctions Policy will govern the procurement of all solar, wind power, and other renewable energy projects larger than 20MW, to the exclusion of geothermal projects. Notably, Small Hydro power projects not exceeding twenty megawatts (20 MW), Biomass and Biogas projects will be procured under the 2021 Feed in Tariffs Policy on Renewable Energy Resource Generated Electricity (Small-Hydro, Biomass, Biogas) (2021 FiT Policy), while geothermal power projects will be procured under the Policy on Licensing of Geothermal Greenfields.

Secondly, the Auctions Policy will apply to all solar and wind power projects that are currently under the 2012 FiT Policy but have not signed a PPA, despite having an approved Expression of Interest. The Auctions Policy will be subject to review every five (5) years from the date of its publication, subject to exceptional cases that may warrant an earlier review. Once reviewed, the Auctions Policy will apply prospectively to power projects.

Role of the Ministry of Energy

The Ministry of Energy will be tasked to announce the auctions upon receiving advice from the LCPDP/INEP Committee on the appropriate timing and targeted capacity. The Ministry will further have the responsibility of determining the site selection requirements necessary for bidders to participate in the auctions. As part of its guiding role, the Ministry of Energy will provide the bidders with the information necessary to prepare their proposals.

The Auction Mechanism

Once approved, the renewable energy auctions under the Auctions Policy will be done through a two-stage bidding process, with the first one being the prequalification stage, where bidders will undergo a preliminary evaluation process, and the second stage, where the bidders undergo a technical and financial evaluation (if they pass the first stage).

Stage 1 (Preliminary Evaluation)

At the preliminary evaluation stage, bidders will have to demonstrate that they have: the requisite experience to implement the project; sufficient financial capability; an appropriate (stage 1) bid bond; land rights/access rights to the plant and interconnection infrastructure; the proposed technology, preliminary design/configuration, scale and annual energy is viable and consistent with the site constraints as outlined in the maximum megawatts export rating from the site; the proposed grid connection route; and provision of constitutional documents. Bidders who successfully demonstrate the above will be invited to submit a full proposal for the second stage of the auction mechanism. For unsuccessful bidders, the bid bond submitted during stage 1 will be returned to them.

Stage 2 (Detailed Technical and Financial Evaluation)

For the detailed technical evaluation, the successful bidder will be required to submit a proposal in response to a Request for Proposal; a sealed price bid; and a stage 2 bid bond. The sealed price bid will not be opened until the bidder successfully passes the second stage of the auction mechanism. At this stage, the bidders will receive their stage 1 bid bond. The stage 2 bid bond is returned to the bidders who are to be unsuccessful in this second stage.

Once implemented, Kenya will be well placed to benefit from the following advantages of this procurement method:

a) Enhanced Competition and Transparency

By their very nature, renewable energy auctions are a competitive way of procuring electricity. The auctions require participants to submit their bids for the development of power projects, and the bids are then compared against each other to determine the lowest possible bid. This comparison of bids allows for competitive pricing of power. Renewable energy auctions also create market opportunities for investors in the electricity sector and allow consumers to benefit from low electricity prices as a result of the competition.

b) Price Discovery Mechanism

Unlike FiT Policies, the proposed Auctions Policy will not apply pre-determined tariffs as the tariffs will be determined on a market basis. This gives way for the application of price discovery, which is the process of determining the spot price for renewable energy based on factors such as supply and demand. Bidders will state the price they are willing to sell their renewable energy for, while buyers will indicate the price they are willing to pay for the renewable energy. Through this price discovery, parties can find an equilibrium price. A price discovery mechanism will further enhance energy sector planning by improving the ability of the relevant stakeholders to assess what renewable energy is undersubscribed or oversubscribed in the renewable energy auctions.

c) Reduced Demand Risk

Demand risk exists where the demand for power is higher or lower than what was projected by the relevant stakeholders. The country’s current energy strategy seeks to mitigate this risk by ensuring that the LCPDP is aligned to the proposed Auctions Policy to ensure that the projected demand meets the country’s energy needs. Therefore, while the LCPDP ensures that the correct demand is projected and the project pipeline is clearly determined, the Auctions Policy ensures that the auction-specific projects under the LCPDP are implemented.

The implementation of the Auctions Policy seems inevitable. This notwithstanding, the Ministry of Energy needs to consider gaps that might undermine the success of the Auctions Policy in Kenya.

a) Absence of Deadlines and Penalties

As currently drafted, the Auctions Policy lacks an accountability framework. For example, there are no consequences under the Auctions Policy for a bidder who fails to develop a power project within a prescribed time upon winning a bid.

To remedy this, the possible challenges associated with the proposed renewable energy auctions need to be identified, and stakeholders must determine what penalties and deadlines would be best suited to address these challenges. However, these punitive measures ought not to be counteractive. Excessive deadlines and penalties might lead to high bids for power projects to avoid the adverse effect of tight deadlines. More specifically, to cater for the penalties, bidders would increase the price of their submitted bids, ultimately leading to higher electricity costs for consumers.

b) Risk of Collusion between the Bidders

The success of the Auctions Policy is pegged on ensuring that the process is competitive and free from influence. However, there is a risk that participants in the renewable energy auctions might collude to drive up the prices of electricity and exclude other bidders from the process.

A renewable energy auction can either be static or dynamic in nature. Under a static auction, the participants submit the bids simultaneously while under a dynamic auction the participants submit their bids through several rounds. A static auction is one way of dealing with collusion as the bidders are unaware of the other participants’ bids. However, under a dynamic auction, participants are able to see the other bids and amend their bids accordingly. Therefore, static auctions are ideal for countries which are new to renewable energy auctions as they can reduce the risk of collusion.

c) Absence of a Ceiling Price

A ceiling price is the price at which bids are capped, with bids submitted above this price being disqualified. Creating a ceiling price under the Auctions Policy would allow the Ministry of Energy to control the price of electricity and ensure that it is affordable for consumers. Where auctions are undersubscribed, a ceiling price ensures that bidders do not price their electricity at exorbitant prices. However, it will be important for the Ministry of Energy to disclose, in advance, the ceiling price to bidders once the same is determined. This is to ensure that genuine bidders are not disqualified for pricing their bids above the ceiling price because of lack of knowledge.

Conclusion

While Kenya is on the right path towards implementing renewable energy auctions, a lot is yet to be done to ensure its success. The power sector stakeholders face a tall order to ensure that the country not only benefits from the Auctions Policy, but that the gaps in the proposed Auctions Policy are addressed.

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Introduction

Over the recent past, there has been a notable shift by pension schemes towards seeking alternative investment options arising out of diversification considerations. This move has seen the percentage of investments in private equity and venture capital (PEVC) firms in the asset management register of pension schemes increase, indicating a positive reception of these alternative investment avenues by pension schemes.

PEVC firms offer viable investment options to individuals, companies and entities seeking to expand their portfolio. Although PEVC firms are normally used as a generic term for entities involved in investing in private equity, this misconception stems from the lack of appreciation of the different roles they play.

First, private equity firms inject capital in companies whose operations are deeply rooted in the economy, that is, mature companies with some level of established market accessibility. On the other hand, venture capital firms usually assist companies that are seeking to breakthrough at the initial stages.

Ideally, for an entity to fall within the radar of venture capital firms, it would first have to create a base, by either using seed capital and later turning to angel investors (if necessary) and finally resort to venture capital firms when growth is constant. Thus, as is discerned from the foregoing, venture capital is in fact a subset of private equity.

In Kenya, private equity firms unlike venture capital firms, are largely unregulated.

Investing Pension Funds

Pension provides some level of security upon retirement which in turn helps maintain and sustain the standard of living after retirement. Due to their very nature, pension fund assets require a high degree of management to guarantee returns for retirees. For the longest time pension funds were limited to fixed securities or government securities, which resulted in a stable return for the assets invested. However, this also meant low returns as most fixed investments usually have a low return rate.

Changing market conditions and the need to improve the range of income generating sources, have seen a diversification in the range of pension fund investment classes. Consequently, most pension schemes have started allocating a portion of the pension fund’s assets to alternative investments, which are essentially investments that do not form part of the orthodox asset types such as listed equity, government securities, bonds or cash.

Unlike the traditional forms of investments, alternative investments come with an element of high risk-adjusted returns, meaning that whereas there is a higher risk in specific investments, the same comes with the possibility of better returns.

Sections 37 and 38 of the Retirement Benefits Act (RBA) lists the range of permissible investments and the restrictions in dealing with retirement funds. The said sections of the RBA provide that scheme funds shall be invested with a goal of securing market rates of return on the investment, and to do so, schemes should formulate a provident investment policy. However, pension schemes are prohibited from using the funds in the scheme for advancing loans, or investment that goes against the guidelines prescribed by the Cabinet Secretary, National Treasury.

The RBA is supplemented by several guidelines and regulations, including the Retirement Benefits (Forms and Fees) Regulations, 2000 (the Regulations). The Regulations provide a category of permissible investments for pension schemes under Table G. PEVC firms are included under the table at part 13 and the extent of investment in percentage is also specified for such firms to be ten percent (10%) of the total scheme funds.

It is important to note that the Regulations do not provide the type of PEVC firm that a pension scheme can invest in. Therefore, it is upon the trustees of schemes to identify the most suitable PEVC firm and proceed to invest the funds to the extent of statutory limits.

The steady growth of investment in PEVC by pension schemes is remarkable, as was noted by Charles Mwaniki when writing in the Business Daily on 2nd October 2020. With the expansion of pension funds, it is almost certain that investment in PEVC by pension schemes will similarly grow.

PEVC firms come with inherent and unique risks, hence an investment which initially appears appealing on paper, may result in substantial loss. It is important for pension schemes to review a company’s performance, financial position and portfolio and to assess the chances of a positive return on an investment.

This would create a level of predictability which aligns with the pension scheme’s investment plan. However, it is noteworthy that companies are often susceptible to unforeseeable factors including market forces which may make it difficult to project the company’s business performance based on previous years’ financial yields.

Regulatory Framework

A look at the regulatory framework is necessary to understand the environment in which PEVCs operate in Kenya and whether the law offers enough protection to safeguard the retirement benefits of retirees.

PEVC firms are subject to several laws depending on the structure of the legal entity. If the private equity firm is a company, then the provisions of the Companies Act, 2015 and regulations thereunder will govern the conduct of business, whereas if it is a partnership, then the relevant partnership laws will apply depending on the structure of the partnership. However, there are no sector specific laws that govern private equity firms.

Venture capital firms on the other hand, have been under the regulatory ambit of the Capital Markets Authority (CMA). To operate as a registered venture capital firm, one must satisfy the eligibility requirements as set out under the Capital Markets Act (Cap 485A Laws of Kenya) (CMA Act) and the Capital Markets (Registered Venture Capital Companies) Regulations, 2007. Once the prerequisites for qualification are met, the venture capital firm is then required to lodge an application for approval with the CMA.

It is important to note that private equity firms were recently brought under the control of the CMA. Section 30 of the Finance Act 2020 amended section 11 of the CMA Act to include PEVC firms that have access to public funds in the list of entities that must be licensed or approved by the CMA. This followed the CS National Treasury’s remarks while reading out the 2020/2021 Budget Statement whereby he proposed an amendment to the CMA Act to subject PEVC firms to the oversight of the CMA due to the risk factor posed by such firms especially in relation to public funds.

Subsequently, the CMA Act was amended to provide that the CMA shall have authority to license, approve and regulate PEVC firms that have access to public funds. However, this amendment still leaves a lot to be desired as what constitutes public funds has not been defined and is therefore ambiguous.

Furthermore, there are no provisions detailing the requirements, procedure for approval and obtaining of licences by PEVC firms that have access to public funds. It is hoped that this might become clearer upon promulgation of the relevant regulations.

PEVC stakeholders have however advised against the move to regulate PEVC in Kenya stating that the current regime is already sufficient. Speaking through their representative, the East Africa Private Equity and Venture Capital Association, PEVC firms have stated that this would amount to “overregulation”, noting that pension schemes are already governed by the Retirement Benefits Authority.

It is important that a balance is struck to ensure that PEVC firms operate with the business flexibility plans that have thus far been the success of these type of alternative investments. It is also noteworthy that at a very basic level, PEVC firms are governed by the law relating to contract.

Outlook

In the coming years, depending on the performance of PEVC firms and the returns made for pension schemes, the discussion is likely to move towards increasing the share of funds deposited with PEVC firms. Currently, however, the laws governing investments in PEVC by pension schemes are inadequate to facilitate proper security for pension funds while at the same time allowing diversification of investments by pension schemes.

It is for this reason that there is need for better regulation on investment of pensions funds in PEVC firms in Kenya. The regulations should indicate, amongst others, what amounts to public funds, the threshold for approval for PEVC firms to handle public funds and the prerequisites to be met before the CMA issues trading licenses. This is likely to translate to increased confidence in PEVC firms and higher investments in them by pension schemes.

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Insolvency is arguably one of the most daunting outcomes for a company. However unfathomable it may be, it cannot be completely written off as companies are prone to financial difficulties which may be attributed to cut-throat competition, reduction in demand of the product coupled with an increase in the cost of production, increase in bad debts, among a host of other reasons.

For a long time, the only recognised outcome for insolvent and distressed companies in Kenya was winding up and in rare cases, receivership. However, the Insolvency Act, 2015 (the Insolvency Act) ushered a move away from these draconian outcomes and introduced the concept of rescue procedures.

To this end, the Insolvency Act has placed emphasis on maintaining companies as going concerns for the benefit of all concerned through various rescue procedures including but not limited to company voluntary arrangements, administration, and administrative receivership.

Administration

Administration commences with the appointment of an administrator who may be appointed by the company or its directors, the Court, or the holder of a floating charge. The objectives of administration are to maintain the company as a going concern, to obtain a better outcome for the company’s creditors than would be if the company was liquidated, and to realize the property of the company so as to distribute the same to secured or preferential creditors.

Once an administrator is appointed, a moratorium comes into play. During the existence of the moratorium, proceedings and execution against the company are stopped and creditors may only exercise their rights against the company with the consent of the Court or administrator.

The main difference between an administrator and an administrative receiver is that the latter is available to a debenture holder in respect of a debenture that was created before the coming into force of the Insolvency Act. However, the roles and obligations of an administrative receiver are, in essence, no different from an administrator appointed under the Insolvency Act since he or she is required to be a qualified insolvency practitioner, a designation with specific obligations under the Insolvency Act.

The main attraction of administration is the protection it affords a company by deflecting any liquidation attempts by creditors. This gives the company time to turn around its financial affairs. On the flipside, administration bears some downsides such as the ceding of controlling rights over the company from the directors to an insolvency practitioner. In addition, being a public process, administration is in the public domain and this may act to deter suppliers, affect investor confidence, and reduce employee morale.

Company Voluntary Arrangement

A company voluntary arrangement (CVA) is, on the other hand, a scheme where the company’s directors propose a plan to settle the debts of the creditors. If the plan is approved, the company will continue trading on a more flexible repayment schedule. A CVA is usually managed by an insolvency practitioner who is either selected by the directors and confirmed by the creditors or appointed directly by the creditors. Once a CVA is approved, a moratorium comes into place and prevents any debt recovery proceedings or action against the company unless with the approval of the Court.

Unlike administration, CVA’s are rarely in the public domain and as such, the process enjoys some privacy. Moreover, due to the informality of the process, it gives greater latitude to stakeholders to come up with ideal solutions tailored specifically to the difficulties facing the company. Of note is that since CVA’s are largely controlled by creditors, unless most of the creditors approve the process and for the duration of it, it may well collapse should the creditors not fully buy into the process.

Corporate Restructuring

The Companies Act, 2015 (the Companies Act) also contains rescue procedures such as compromises, arrangements, reconstructions, and amalgamations, all of which permit a company that is in distress to initiate negotiations with its creditors to obtain a favourable outcome for all concerned parties.

The umbrella term for the above processes is corporate restructuring which may be commenced by a company, its directors, members, creditors, and insolvency practitioners. There are no defined parameters for corporate restructuring and it may include reorganization of a company’s shares, an amalgamation of two or more companies, compromises with creditors, or any act that alters the company’s financial position.

A restructuring takes effect once approved by the Court and the stakeholders in a meeting. It comes with several advantages as the arrangement is predicated on making the business more profitable with the idea of obtaining a positive result for the creditors.

Corporate restructuring is generally a good response for a company with a declining business as it helps revive it thereby increasing the value of the company. However, if not done properly, a restructuring may result in increased losses being incurred by the company due to substantial costs and expenses attendant to the restructuring process such as consultation fees, professional fees and legal compliance costs.

As highlighted above, companies in distress in Kenya have a range of options available to them under both the Insolvency Act and the Companies Act which, when properly applied, can improve the financial position of the company and delay, or avoid liquidation altogether.

The Courts in Kenya have also been supportive of rescue arrangements and have been reluctant to interfere with entities that are pursuing corporate rescue procedures. Prominently, there was an attempt by some creditors to stop the debt restructuring that had been commenced in respect of Kenya Airways in 2017 in the case Equity Bank Kenya Limited v Kenya Airways PLC & 11 others (2017) eKLR. The applicants argued that there were no legal provisions that permitted the restructuring process that was happening at the time.

The Court, however, in rejecting this position, stated that the said restructuring was undertaken pursuant to section 926 of the Companies Act, which permits companies to enter such arrangements, and pronounced itself as follows:

“It is common ground that the 1st respondent is in the process of restructuring in an effort to secure additional capital that will see it continue as a going concern. The Companies Act provides a mechanism under which a company may enter into a scheme of arrangement with its creditors. Under section 926 of the Act, a company may present a compromise or arrangement to the Court for sanction where a majority of the creditors, or the members voting at a meeting, convened in accordance with section 923 have agreed with the compromise or arrangement.”

Under the said provision of the law, companies experiencing financial difficulties may opt to enter any arrangement that will help alleviate their financial situation and these may include ceding entitlements by creditors, trading reorganization, use of derivatives (where applicable), debt to equity swaps, share capital restructuring, mergers and acquisitions and halting proceedings against the company.

Conclusion

A distressed company should act early to avoid going into liquidation. Whereas there is a wide range of options available to a company in distress, these options may be limited if an insolvency situation is left unaddressed rather than dealt with immediately. Some of the subtle signs of impending insolvency that companies can look out for include cases where the business is expanding too fast, missing forecast targets consistently, entry of competition into the market amongst others.

Finally, it is important to note that a selected statutory rescue procedure can only achieve its intended goal if the relevant stakeholders are involved and cooperate. These stakeholders include financiers, suppliers, employees and landlords who must lend support to the selected rescue procedure for the same to be successfully implemented.

Proposed Provision for Amendment Proposed Amendment Our Comments
Preamble

The long title

The Bill proposes to introduce an amendment act to amend various petroleum products’ taxes and levies related laws, restructure the management of Petroleum Development Fund, and ensure all regulations relating to taxes whether negative or positive are approved by the National Assembly. The Bill seeks to review taxes and levies on petroleum products with a view of making the products cheaper by reducing the taxes and levies applicable to petroleum products.

It further seeks to restructure the Petroleum Development Levy by clearly providing for the manner and the purposes for which the funds shall be administered and used as opposed to be being under the discretion of the Cabinet Secretary (CS) in charge of Petroleum & Mining.

Finally, the Bill clips the CS’ powers to discretionary review of taxes and levies upwards or downwards without the approval by the National Assembly.

 

Clause 2

Amendment of section 198 of the Energy Act (No.1 of 2019)

Insertion:

The Bill proposes to introduce additional requirements relating to the power of the Cabinet Secretary to make regulations by inserting the following:

  • The CS may by notice in the Gazette amend the Sixth Schedule (which is a proposed schedule to the Energy Act, 2019);
  • The Notice to amend the Sixth Schedule shall be laid before the National Assembly within 7 days of its publication; and
  • The National Assembly shall, within 28 siting days from the date of Gazette Notice to amend the Sixth Schedule, consider the proposed amendments and make a resolution either to approve or reject the amendments in the notice.
  • The business name
  • Concise description of the true nature of the business
If passed, the amendment divests the CS of the discretionary powers to determine the pricing of the petroleum products, pipeline tariff, delivery rates and bridging rates, and x-factor, maximum allowed operational losses, and maximum allowed margins, and places them under the scrutiny of the National Assembly.
 

Clause 3

Amendment of section 224 of the Energy Act (No.1 of 2019)

Insertion:

The Bill proposes to amend section 224 of the Act by inserting subsection (3) revoking the Energy (Petroleum Pricing) Regulations, 2010 as amended in 2012.

The revocation removes petroleum pricing from the vagaries of the Committee on Delegated Legislation together with the CS for Energy and places it under Schedule Six to the Energy Act, 2019 where the National Assembly shall make and exercise foresight over petroleum pricing.
 

Clause 4

Insertion of a New Schedule to the Energy Act, 2019

Insertion:

The Bill amends the Energy Act, 2019 by introducing a new schedule immediately after schedule five to the Act.

The amendment brings the pricing of petroleum products, pipeline tariff, delivery rates and bridging rates, and x-factor, maximum allowed operational losses, and maximum allowed margins under the purview of the National Assembly instead of the Committee on Delegated Legislation or the CS.

The CS will, therefore, have no powers to determine, through regulations, the pricing and rates without the approval of the National Assembly as provided under the proposed section 198(3), (4) and (5) of the Act.

 

Clause 5

Amendment of section 10 of the Excise Duty Act, 2015

Deletion and Substitution:

The Bill proposes to delete the requirement for the Commissioner with the approval of the CS to adjust specific rates of excise duty every year and substitute it with adjustment of excise duty rates every two years.

This would increase the period within which the Commissioner for Domestic Taxes in liaison with the Cabinet Secretary for Energy may adjust the rates for excise duty to consider the inflation.

Every time rates are adjusted, the fuel prices spike, hence increasing the adjustment period from one to two years minimises tax increments and the fuel prices remain stable for the duration.

 

Clause 6

Amendment of Schedule 1 to the Excise Duty Act, 2015

 

Insertion:

The Bill seeks to insert a proviso to paragraph 2(1) of the First Schedule to exclude the rates of excise duty for following petroleum products from being adjusted every financial year:

  • Motor spirit (gasoline) premium;
  • lluminating Kerosene;
  • Gas oil (automotive, light, amber for light speed engines);
  • Diesel oil (industrial heavy, black, for law speed marine and stationery engines).
These are the commonly consumed petroleum products available in every household in Kenya. Excluding them from being adjusted every financial year, therefore, protect the citizens from the tax burden that comes with the tax rates adjustment.

Also, the amendment inadvertently removes the powers of the Commissioner in liaison with the CS to adjust the excise duty rates for these products and confers the authority on the National Assembly.

It is, however, not clear from the wording of the Bill whether the tax rates for these products will indefinitely not be adjustable.

 

Clause 7

Amendment of section 2 of the Petroleum Development Fund Act, 1991

Insertion:

The Bill introduces new definitions in the Act in the following alphabetical order:

“Authority” means the Energy and Petroleum Regulatory Authority established under the Energy Act, 2019;

“Cabinet Secretary” means the CS for the time being in charge of Petroleum; and

“Levy” means the Petroleum Development Levy established under section 3 of the Act.

The new definitions provide clarity. It differentiates between the CS for Energy and CS for Petroleum since the two could confuse the actors in the energy sector because petroleum falls under the class of products included in the statutory definition of energy.
 

Clause 8

Amendment of section 3 of the Petroleum Development Fund Act, 1991

Deletion & Substitution:

The Clause proposes to commute the role of the Cabinet Secretary to make a petroleum development levy order by deleting and inserting the following:

  • Prescribing the specific amount of levy to be paid on all petroleum fuels in accordance with the tariff code provided in the 1st Schedule;
  • States that the levy shall be paid to the Petroleum Development Fund (the ‘Fund’);
  • Providing that the oil marketing companies shall be a levy remitter, must register with a collector, and pay levy immediately upon importing any petroleum fuel;
  • Obligating the commissioner to keep record of the companies that pay the levy and submit the monthly return of the payment of levy to the CS;
  • Providing that the collector shall to the Fund all the levy collected during the month;
  • Providing that an unpaid levy shall be summarily collected as a civil debt by the commissioner in the event a levy remitter fails to comply;
  • Providing that non-compliance shall be subject to a fine amounting to 5% of the unpaid amount monthly and recurs for the duration the dues remain unpaid; and
  • Introducing a penalty for failure of the levy remitter to comply with the above provisions.
 

The amendment removes the ambiguity and the uncertainty associated with the petroleum development levy. It provides for simple and clear procedures for collecting the levy and the attendant penalty for non-compliance. The Act had left it to whims of the CS who created mandatory obligations upon which penalties could arise.

 

Clause 9

Amendment of section 4 of the Petroleum Development Fund Act, 1991

 

Deletion & Substitution:

The Bill amends section 4 of the Act by introducing additional use of the monies in the Fund being:

  • The stabilisation of local pump prices in instances of spikes occasioned by high landed costs above a threshold determined by the authority.

It also empowers the CS to request the administrator of the Fund for a draw down from the Fund to stabilise local petroleum pump prices when necessary.

 

If passed, the amendment cushions the common citizens from the high prices associated with the rise in the global petroleum prices. The funds will be granted as a subsidy when the global fuel prices shoot up or when there is need to upgrade the infrastructure in the energy and petroleum industry.

 

Clause 10

Amendment of the Petroleum Development Fund Act, 1991 by insertion of section 4A

 

Section 5(b)

 

The Bill proposes to introduce a new section 4A which create a Petroleum Development Fund Advisory Board.  Subsection (2) states that the Advisory Board shall be unincorporated and shall comprise of:

  • One person appointed by the CS for Finance; one person appointed by the CS for Energy; and one person appointed by the CS for Petroleum & Mining; one person representing the Authority.

Subsection (3) provides for the functions of the Advisory Board as follows:

  • Approves withdrawals out of the Fund; and
  • May impose conditions on the use of any expenditure authorised and may impose any reasonable prohibition, restriction, or any other requirement on the use of such expenditure.
The creation of the Advisory Board reinforces the management of the Fund. It enhances the division of roles since it separates administrative functions from the supervisory powers. It clips the administrator of the powers to exercise oversight over the uses of the fund and transfer them to the Advisory Board.

This is important because in the past the administrator, who is appointed by the Treasury, had funded projects outside the scope of usage of the Fund specified in the Act.

 

Clause 12

Revocation of PDL Orders, 2020

 

Deletion:

The Bill proposes to revoke the Petroleum Development Levy Orders issued by the CS in 2020.

The amendment would simply replace the Petroleum Development Orders as issued by the CS with the prescribed levy and their corresponding tariffs codes provided in the First Schedule to the Act.
 

Clause 13

Amendment of Petroleum Development Fund Act, 1991 by insertion of Schedule 1

 

Insertion:

The Bill introduces a new schedule to the Act which provides for the tariff code and the corresponding rates of levy in Kenyan Shillings.

This makes the taxes or levies payable by a remitter ascertainable in line with the principles of efficient tax system.
 

Clause 14

Amendment of section 15 of the Statutory Instruments Act, 2013

Insertion:

The Bill proposes to introduce a provision under the statutory instruments Act which requires all regulations containing provisions dealing with taxes, levies, or fees, or has the effect of imposing a charge on the public or fund or variation or repeal of any such charge to be tabled before the National Assembly within twenty-eight sitting days from the date of receipt of notice under section 11 of the Act.

This would make any regulations relating to taxes, levies, or fees to be mandatorily approved by the National Assembly before they become effective.

Although the Statutory Instruments Act already has provisions for scrutiny of regulations by Parliament, the amendment makes it mandatory for the National Assembly to either approve or reject it. Hence, regulations relating to taxes, levies or fees cannot become effective by default if Parliament fails to consider it within twenty-eight days.

Clause 15

Amendment of section 5 of the VAT Act, 2013

 

 

5(2) (ab)

Deletion & Substitution; and Insertion:

The Bill proposes to amend section 5(2) of the VAT Act by reducing the chargeable VAT on petroleum products listed in Part 1 Section B of the First Schedule to the Act from 8% to 4%.

If passed, the amendment reduces the VAT tax burden on the consumers of petroleum products by half.
It also seeks to insert a new subsection 5(2) (ab) which imposes a VAT of 8% of the taxable value on liquified petroleum gas including propane. Further, the amendment seeks to reduce VAT chargeable on liquified petroleum gas including propane gas which were initially zero-rated but were subjected to 16% VAT in the recently passed Finance Act, 2021.
Proposed Provision for Amendment Proposed Amendment Our Comments
Section 28 (1) of the KDI Act, 2012 Deletion & Substitution:

The Bill proposes to amend by deleting the subsection providing for “one hundred thousand shillings” as amended vide Gazette Notice No. 159 of 2020 to “five hundred thousand shillings” and substituting it with “Kenya shillings one million”

If passed, the amendment cushions depositors by increasing the maximum payable coverage limit to KES 1 Million instead of KES 100,000 or KES 500,000 (as recently amended) to avoid exposing the depositors to the risk of loss in the event the bank is under liquidation.

This would boost the confidence of the investors and depositors in banking institutions and spur a greater saving culture among Kenyans.

Section 28 (2) of the KDI Act, 2012   And   Section 33(6) Deletion & Substitution:

The Bill seeks to scrap the requirement for the KDIC to consolidate all the accounts of a depositor before KDIC can pay the maximum coverage limit.

The Bill equally proposes to amend section 33(6) of the Act by expanding the time for making payments for claims within one (1) month to six (6) months or any lesser time.

This would allow depositors holding more than one account with a Bank to claim maximum coverage for the two or more accounts, unlike the current provision, where depositors are entitled to be paid the maximum coverage limit for consolidated accounts held by an individual in one bank.

Under the International Association of Deposit Insurers (IADI) Principles of Effective Deposit Insurance Systems, the maximum payable guarantee for depositors is capped per depositor as opposed to per account that a depositor holds with the bank. Whereas preventing KDIC from consolidating the accounts of a depositor would be advantageous to the depositor, the same would go against the IADI Principles of Effective Deposit Insurance Systems.

Section 28 (2) of the KDI Act, 2012 Insertion:

The Bill proposes to introduce a penalty for failure of the KDIC and its officers to comply with the six (6) months’ timelines within which to pay the claims as provided under the Act.

The introduction of a penalty for non-compliance is meant to compel prompt payment by KDIC to depositors within the stipulated time once claims are lodged.

By way of Gazette Notice Number 9798 published in the Kenya Gazette on 17th September 2021, the Nairobi County Government has announced the grant of a 100% waiver on all penalties and interest on land rates within the County.

The waiver is valid for a period of two (2) months, with effect from 1st October 2021 through to 30th November 2021 (inclusive of both days). As such, all payments of land rates made within the waiver period will be clear of any surcharge in the form of penalties or interest for late payment.

All concerned parties should exploit the waiver, to ensure the relevant properties’ rate payments are brought up to date. Our team of experienced advocates is available to provide any support you may need with regard to this notice.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications with respect to this alert, please do not hesitate to contact Pamella Ager, Managing Partner (pamella@oraro.co.ke), and James Kituku, Partner (james@oraro.co.ke).

Further to our previous alert on the waiver of penalties and interest on accrued land rates for properties within Nairobi County, we note that the Nairobi City County has in a Public Notice indicated that the waiver period is only for a period of one (1) month i.e. from 1st October, 2021 to 31st October, 2021 (both days inclusive) as opposed to the period indicated in the Gazette Notice of two (2) months from 1st October, 2021 to 30th November, 2021 (both days inclusive).

Whereas in cases of any conflict as to the contents of a Gazette Notice and a Public Notice then the former should prevail, we nevertheless advise all concerned parties to make an informed decision in terms of taking advantage of the opportunity availed under the waiver for payment of any outstanding land rates.

In the meantime, we shall keep you updated in case of any further communication or clarification from the relevant authorities.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications with respect to this alert, please do not hesitate to contact Pamella Ager, Managing Partner (pamella@oraro.co.ke), and James Kituku, Partner (james@oraro.co.ke).

In a landmark Judgment delivered on 14th October 2021, the High Court of Kenya (Ngaah J) has found that the Data Protection Act, 2019 is of retrospective effect and proceeded to issue an order of certiorari to quash the Government’s decision to roll out Huduma Cards and an order mandamus to compel the Government to conduct a data protection impact assessment (“DPIA”) as mandated by section 31 of the Data Protection Act, 2019  (the “DPA”) before further processing and rolling out of Huduma Cards.

In arriving at this decision, the High Court found that the DPA was intended to apply retrospectively so as to cover any action that may be deemed to affect the right to privacy as protected under Article 31 (c) and (d) of the Constitution of Kenya, 2010. The Court’s finding, though of doubtful grounds, was based on the reasoning that the DPA was a statute that caters for procedural, rather than substantive rights, as it provides for the means of implementation of the right to privacy as conferred by Article 31 of the Constitution.

Our take is that the DPA, quite contrary to the Court’s analysis, provides for substantive, rather than procedural rights, with the latter provided for under the various regulations promulgated and to be promulgated under the DPA. In this regard, it is noteworthy that the preamble of the DPA provides that the Act is created not only to give effect to the provisions of Article 31 (c) and (d) of the Constitution but also to provide for the rights of data subjects, which the DPA proceeds to provide for under various sections of the DPA, including the cornerstone section 26 of the Act.

Indeed, it is from the said substantive rights that the duties and obligations of data controllers and data processors arise, including the need to undertake a DPIA where the processing of personal data is likely to pose a risk to the data subject. We further note that there is no express provision under the DPA as to its retrospectivity, and so the Court ought to have been slow to impute such an intention by the lawmakers i.e., Parliament, in the absence of an express provision to that effect.

It is also not clear why the Court failed to find or consider whether there was a public interest element in the processing and rolling out of Huduma Cards, that would warrant the exemption of the DPA thereto, pursuant to the provisions of section 51 (2) (b) of the Act.

Whilst we harbour doubt that the Court’s decision will withstand appellate scrutiny, (we note that the Attorney General has already filed a Notice of Appeal against the Court’s decision), the decision currently stands as a lawful and binding decision passed by a Court of competent jurisdiction. In the circumstances, until such time that the decision is either stayed, varied or set aside all persons and entities that collect personal data and/or have collected data from the period running from 27th of August 2010, when the Constitution was promulgated onwards, will be required to consider whether the data processing was compliant with the provisions of the DPA, or stand to suffer the risk of retrospective liability.

Practically, this means that data processors and data controllers are advised to carry out comprehensive audits of their data collection and processing mechanisms so as to ensure compliance with the provisions of the DPA, which include but are not limited to the carrying out of a DPIA where the data processing activity carries with it potential risk to data subjects.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken or be construed as a  legal opinion. If you have any queries or need any clarifications as to how this decision or any other aspect of the Data Protection Act, 2019 might affect you, please do not hesitate to contact John Mbaluto, FCIArb (john@oraro.co.ke), Jacob Ochieng (jacob@oraro.co.ke), Daniel Okoth (daniel@oraro.co.ke), Milly Mbedi (milly@oraro.co.ke), Nancy Kisangau (nancy@oraro.co.ke) or your usual contact at our firm.