Regulators tighten grip on predatory lending practices

Commercial banks, Saccos and digital lenders in the country that have built fortunes on rushed auctions and fire-sale seizures face a sweeping regulatory crackdown including loss of licences, after the Central Bank of Kenya (CBK) and six other watchdogs unveiled rules that force lenders to offer repayment relief to distressed borrowers before touching collateral.

The draft Financial Consumer Protection Framework, backed by the CBK and the Sacco Societies Regulatory Authority (Sasra), effectively outlaws the practice of dispatching auctioneers the moment a borrower misses a single installment, a tactic that has pushed millions of Kenyans, including former top government officials, teachers, doctors, farmers and small traders and manufacturers, from wealth and financial stability into the streets and economic ruin. 

“Before taking any enforcement action, Financial Services Providers (FSPs) shall consider and propose potential assistance appropriate to the consumer’s situation,” the new rules  demand. That assistance, the new rules state, includes extending loan terms, deferring payments, reducing interest rates or granting repayment holidays.

The regulators including CBK, SASRA, the Insurance Regulatory Authority and the Competition Authority, have committed to “credible enforcement”, with graduated sanctions including fines and licence revocation for repeat offenders. A joint working group will oversee implementation, and the framework will be reviewed every five years.

For years, distressed borrowers had no such lifeline. “I had paid 90 per cent of my Sh5 million logbook loan. I defaulted by one month because my mother fell sick. The bank sent auctioneers that very week,” said Joseph Mwangi, a transport operator in Naivasha. “They sold my lorry for a quarter of its value. Now I am bankrupt. They refused to even talk about a repayment plan.”

The framework now bans lenders from beginning enforcement proceedings like in Mwangi’s case unless three conditions are met.

For a start the borrower must be genuinely in default, the lender should issue a clear “default notice” stating the nature of the default and the action needed to remedy it, and the default has not been fixed within the period given.

The notice must also inform the borrower of their right to seek repayment assistance.

 “An FSP shall not begin enforcement proceedings against a retail consumer in relation to a credit contract unless… the default has not been remedied within the period specified in the default notice,” the rules read.

Consumer advocates say some rogue lenders and credit societies (Saccos) often working with cartels in the auctioneering, have turned loan recovery into a predator’s playground.

 “They are worse than loan sharks,” said Sarah Kimani, a teacher and a victim of a rushed repossession. “A loan shark at least negotiates. Some of these lenders rush to auction your land or car when you are 30 days late even if you are about to clear the loan. We have seen wealthy farmers and lawyers lose multi-million shilling properties in such auctions.”

 The framework also bans physical force, coercion, harassment and false representations about a debt’s legal status during collection. It prohibits lenders from charging default interest on the entire loan balance only on the amount actually in default and while the default continues.

 “Many defaulters have told us stories of pain,” the framework’s preamble acknowledges, noting “over-indebtedness” and “predatory lending practices” as emerging risks.

The rules are part of wider reforms under Kenya’s National Financial Inclusion Strategy 2025/2028.

For Mercy Achieng, a timber seller in Naivasha’s Karagita Estate, the new rules come too late. She lost her plot of land pledged as collateral for a Sh200,000 mobile loan after defaulting for 60 days. “The digital lender refused to listen to me. They sent auctioneers at night to destroy my yard. My title deed was gone before I could even plead with them for more time,” she said.

 Under the new rules, such conduct would be illegal. Lenders must now “act promptly to offer reasonable assistance” to borrowers showing signs of repayment difficulty, “to help prevent their situation from deteriorating.”