The tentative Bill proposes a change in licensing, moving from an annual renewal cycle to indefinite validity. This is accompanied by warrantless inspection powers and significantly higher penalties for unlicensed businesses. Additionally, the minimum core capital floor will increase from KES 60 million to KES 250 million, with the goal of reaching this level within five years. However, the capital ratios remain unchanged.
The Bill aims to introduce group-wide supervision for the first time, as well as stricter ownership, governance rules, and an interest cap on defaulted loans modelled on the in-duplum principle. Additionally, the Central Bank of Kenya will be granted direct, standing access to institutions’ IT systems.
The proposed Bill was officially published in the Kenya Gazette Supplement No. 54 on March 10, 2026. It underwent its First Reading on May 28, 2026, and is currently awaiting its second reading. If enacted, the existing Act will be replaced with a substantially reconstituted framework for the licensing, regulation, and supervision of deposit-taking microfinance businesses in Kenya.
This alert highlights the proposed key changes to the legal framework governing microfinance banks in Kenya.
KEY CHANGES FOR MICROFINANCE BANKS
1. Licensing
Under the existing Act, a microfinance bank’s license expires on December 31st of the year it is granted and must be renewed annually. The proposed Bill aims to change this by stating that once a license is issued, it will remain valid indefinitely unless revoked by the Central Bank of Kenya (CBK).
Currently, the existing Act limits CBK’s power to enter and examine the premises of a suspected unlicensed operator to cases where the High Court has issued a warrant. The Bill proposes to remove this warrant requirement altogether, allowing CBK to enter and examine such premises on reasonable grounds alone.
Furthermore, the financial consequences of operating without a license will increase from KES 100,000 to KES 5 million, with the three-year custodial term remaining unchanged.
2. Group Supervision
The existing Act doesn’t define a “non-operating holding company” or a “group,” so CBK’s supervisory mandate is limited to licensed institutions alone.
The Bill defines a “group” as comprising an institution, its subsidiaries, its non-operating holding company, and that company’s own subsidiaries. It also designates CBK as the coordinator of consolidated, group-wide supervision.
CBK would also be able to appoint a competent authority from the Capital Markets Authority, Insurance Regulatory Authority, Financial Reporting Centre, Communications Authority of Kenya, Retirement Benefits Authority, or SACCO Societies Regulatory Authority to inspect any associate, holding company, or subsidiary of an institution.
3. Ownership, Share Transfers and Governance
The 25% limit on any single person’s shareholding, as outlined in the Act, will remain unchanged. However, the Bill aims to enhance control over transfers. Currently, the Central Bank of Kenya’s approval is only required for transfers exceeding 10% of an institution’s shares. The Bill will lower this threshold to 5% or more, necessitating prior CBK approval before anyone becomes a “significant shareholder.” A significant shareholder is defined as a holder of 5% or more. Under the Bill, significant shareholders would be prohibited from serving as executive directors or holding senior management positions within the institution or its holding company.
The existing Act only requires a board of at least five directors, with an elected non-executive chairperson.
The Bill proposes that three-fifths of the board be non-executive, and one-third be independent non-executive, with an independent non-executive chair. Additionally, the Bill proposes that directors undergo vetting and be deemed “fit and proper” by the CBK. It also proposes re-vetting upon appointment as CEO or Chairperson.
4. Capital Requirements
The proposed Bill maintains the current minimum capital ratios. These ratios require a core capital of at least 10% of risk-adjusted assets, 8% of deposit liabilities, and a total capital of at least 12% of risk-adjusted assets.
Under the Bill, the minimum core capital floor significantly increases, rising from KES 60 million to KES 250 million. This proposed substantial increase is intended to be achieved within five years of the Bill’s commencement.
5. A Narrower Set of Prohibited Activities
The existing Act currently prohibits institutions from trust operations, investing in enterprise capital, underwriting or placing securities, wholesale or retail trade, and acquiring land beyond what’s reasonably necessary for their business.
The proposed Bill aims to relax these restrictions by dropping the limits on trust operations and underwriting or placing securities. It also introduces a new cap, limiting an institution’s interest in any single undertaking to 25% of its core capital. Additionally, the Bill introduces a carve-out that permits the trade and land restrictions to be waived for Shariah-compliant products approved by The Central Bank of Kenya.
6. Direct, Standing CBK Access to IT Systems
A notable change under the proposed Bill is the requirement that institutions grant CBK secure remote online access to their IT infrastructure and information management systems at all times. CBK is entitled to view, extract, or download any information obtained in this way.
7. New Borrower Protections, Including an In Duplum-Style Interest Cap
The proposed Bill requires institutions to disclose all charges, terms, and conditions, including the total cost of credit, before granting a loan. They must also give at least 30 days’ notice before changing any term or charge. Additionally, new products, services, or fee changes require CBK’s prior written approval.
The Bill significantly aims to cap the amount recoverable from a debtor on a non-performing loan, mirroring the in-duplum principle. This principle states that institutions cannot recover more than the principal outstanding when a loan becomes non-performing. The Bill further intends to apply this limit to loans that were already non-performing before the proposed changes.
8. Sharply Higher Penalties Throughout
Currently, insider lending in breach of prescribed limits results in a fine of up to KES 100,000 or three years’ imprisonment, as per the standing Act. Under the pending Bill, the maximum fine will rise to KES 5 million or five years. Failing to comply with an inspection will become a standalone offence, carrying up to KES 10 million or five years’ imprisonment. The general monetary penalty will increase to KES 1 million for an institution or KES 100,000 for an individual, plus KES 10,000 for each day a contravention continues.
9. Deposit Protection
Finally, the proposed Bill states that when CBK intervenes in an institution’s management, it may appoint the Kenya Deposit Insurance Corporation to take control, in accordance with the Kenya Deposit Insurance Act. The Act, rather than the Bill, is more accurately descriptive of the provisions protecting depositors. When the Act is repealed, institutions already licensed under the existing Act will be licensed under the new Bill. Additionally, anything lawfully commenced, done, or executed under the existing Act will continue and be treated as having been done under the new Bill.
Article written by: Melissa Muthama