Proposed law on loan guarantors is overdue

The proposal to amend the law to require lenders to first seize all the assets of a borrower before going after those of guarantors is long overdue and a move in the right direction.

Guarantors appear to have been the soft target when borrowers default on repaying their loans.

Creditors have been quick to seize guarantors’ property before all avenues have been fully explored to ensure borrowers honour their side of the bargain.

To make matters worse, there have been a number of cases where banks, Saccos, microfinance firms and other lending institutions, sidestep the borrower’s assets whose worth can offset the loan, and inexplicably go directly after those of guarantors.

All this should be blamed on the glaring loopholes existing in the law governing contracts related to lending.

Apparently, creditors have a free hand to cherry-pick on the assets available for them to seize, using the current lopsided law to justify their actions.

This places a disproportionate burden of credit default on the guarantors’ shoulders while easily letting the principal borrower off the hook.

It is against this background that the Bill sponsored by Juja MP Francis Waititu to amend Section 3 of the Law of Contract Act could not have come at a better time.

Once the law is passed, banks and other lending institutions will no longer rush to punish the guarantors whose only mistake is to assume part of the risks of borrowing.

In such an environment, guarantors will not be afraid to offset the credit risks, and therefore, credit will easily flow to individuals and businesses. This way, the economy will gain as well as the creditors themselves as more borrowing means increased margins for them.

A word of caution to guarantors though: Even after the Bill is passed into law, and adequate protection accorded to them as envisaged, they ought to carry our due diligence so that they have a thorough knowledge on what they are signing up for. The new law does not mean they should lower their guard.