The government has unveiled a sweeping new law that
effectively declares war on rogue digital money lenders and predatory
microfinance institutions.
If enacted,
the Central Bank of Kenya would have the power to cap debt recovery, block the
seizure of mobile phones as collateral and send unscrupulous lenders to prison
for up to three years.
The
Microfinance Bill, 2026, sponsored by Majority leader Kimani Ichung’wah, comes after years of public outcry over
harassment, illegal interest rates and debt-shaming tactics employed by both
unlicensed and licensed lenders.
According to
the Bill’s
memorandum, the objective is “to provide a safe and sound environment for the microfinance banks to meet the evolving needs of the consumers.”
In what would
radically change the sector, the proposed
law introduces a strict limit on how much money a lender can recover from a
borrower who has defaulted.
As such, the
maximum amount recoverable from a debtor with respect to a non-performing loan
shall be the principal owing when the loan becomes non-performing.
A lender would
also be entitled to recover interest, in accordance with the contract between
them and their debtors, not exceeding the principal owing when the loan became
non-performing.
In plain
language, a borrower who defaults on a Sh10,000 loan cannot be forced to repay
more than Sh20,000 in total, inclusive of all interest and fees, regardless of
how long the debt remains unpaid.
“If a loan
becomes non-performing and then the debtor resumes payments on the loan and
then the loan becomes non-performing again, the limits… shall be determined
with respect to the time the loan last became non-performing,” the Bill reads
in part.
The provision
is to apply retroactively, that is, to loans that were already non-performing
before the law came into force.
Perhaps the
most immediate relief for millions of Kenyans who have received threatening
messages from loan apps is a blanket prohibition on taking certain types of
collateral.
“A
person conducting a non-deposit taking business shall not take any form of
deposit or cash collateral from any person,” the proposed law states.
Lenders that
fail to comply would be liable, upon conviction, to imprisonment for a term not
exceeding three years or to a fine not exceeding five million shillings or
both.
While an
institution may take land as security for a debt, it is strictly limited in
what it can hold.
The clause
explicitly prevents lenders from acquiring any land “except such land or
interest as may be reasonably necessary for the purpose of conducting its
business.”
Crucially, the
provision allows a bank to hold land only in the event of default in payment of
the debt, albeit seeking the opinion of the Central Bank on whether it is
needed for the realisation of the debt.
Unlicensed
lenders face a Sh5 million fine or three years in jail or both, with false
advertising also criminalised.
The Bill also takes aim at the long-standing problem of
directors and significant shareholders using microfinance banks as personal
ATMs.
It prohibits
an institution from granting a loan or credit facility to its associates,
officers, or staff “in excess of such limits as the Central Bank may
prescribe.”
Owners of
microfinance banks are also reigned in, with significant shareholders, those
holding more than five per cent, banned from executive director roles.
All directors
will be vetted by the Central Bank and found to be ‘fit and proper’, with the
regulator getting expanded surveillance powers.
“An
institution shall at all times grant to the Central Bank a secure remote online
access to its information technology infrastructure and information management
systems.”
CBK may “view,
extract or download any information” without prior notice.
If an
institution is found to be “significantly undercapitalised” (defined as holding
less than 50 per cent of prescribed capital), CBK can intervene in management,
remove officers, prohibit bonuses, appoint a competent authority, or even close
the institution and revoke its licence.
Clause 60
empowers CBK to levy monetary penalties of up to Sh1 million on institutions
and Sh100,000 on natural persons for non-compliance, with additional daily
penalties of up to Sh10,000.
Licensed
institutions have a five-year grace period to meet the new core capital
requirement of Sh250 million, as set out in the First Schedule.
The existing
Microfinance Act (Cap. 493C) is repealed in its entirety, but any licence
issued under the old law will continue as if granted under the new regime.
