Court Blocks Debt Recovery by Unlicensed Lenders

In a decision delivered on July 17, the Small Claims Court at Milimani held that any firm conducting lending activities without the required regulatory approval lacks the legal capacity to enforce such contracts through the courts.

The case involved a lender that claimed it had advanced a borrower two hundred and thirteen thousand five hundred shillings, to be repaid as two hundred and twenty-nine thousand five hundred and thirteen shillings in a single instalment. When the borrower defaulted, the outstanding balance was said to have grown substantially, and the loan had been secured against a motor vehicle that later carried a registered caveat.

Before examining the merits of the debt claim, the magistrate first assessed whether the lender was properly authorised. Finding that the claimant held no licence from the Central Bank, the court dismissed the suit outright. The magistrate noted that Section 3 of the Banking Act requires every person or entity carrying out banking or financial business in the country to obtain a licence, and that operating without one constitutes an illegality and creates economic risk.

The ruling offers borrowers a significant layer of protection against recovery actions brought by unregulated operators. At the same time, it serves as a clear reminder to lenders, particularly those in the digital space, that compliance with licensing requirements is a precondition for accessing the courts to enforce loan agreements.

The decision follows recent efforts by the Central Bank to tighten oversight of digital credit providers, a sector that came under formal regulation after legal changes introduced several years ago. Only a fraction of applicants have so far received licences, underscoring the importance of operating within the established framework if lenders wish to rely on legal remedies.