Editorials

Review guarantors Bill to protect rights of lenders

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Parliament buildings in Nairobi. FILE PHOTO | NMG

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Summary

  • The plan by MPs to bring back the Bill that seeks to protect loan guarantors is bound to be welcomed by those facing auction on account of other people’s debts.
  • But care must be taken to address the concerns raised by President Uhuru Kenyatta when he rejected the Bill in February last year.

The plan by MPs to bring back the Bill that seeks to protect loan guarantors is bound to be welcomed by those facing auction on account of other people’s debts. But care must be taken to address the concerns raised by President Uhuru Kenyatta when he rejected the Bill in February last year.

The Bill sought changes to the law to ensure that before a suit is brought against a guarantor, the lender would first be compelled to go after the assets of the principal borrower.

In rejecting the law, President Kenyatta cited the need to protect financial institutions, saying that the proposed changes would negate a long-standing principle of contract law that is relied on by lenders, borrowers, guarantors, investors and other stakeholders in the Kenyan economy, especially in the capital markets.

But what is not in doubt —and this was demonstrated by the strong support for the Bill in Parliament— is that reforms are needed in the area of debt recovery in the country.

The law needs to clamp down on primary borrowers who hide assets after defaulting knowing very well that banks will simply go after the guarantors. Lenders find pursuing guarantors more cost-effective and less time-consuming compared to the long process of trying to trace the principal borrowers’ assets.

Equally important, however, is the President’s concern that guarantors providing third-party security on loans would get a statutory loophole to divert pledged assets during the period when lenders are pursuing the borrower’s assets through the courts. As such, it would seem that there is no win-win position that protects both lenders and guarantors in case of a default under the terms proposed by the Bill in its current form.

In order to make it fair to both parties and practical for the markets, it must be reviewed to close the loopholes identified by the President.

MPs should, for example, include a clause that ringfences the guarantor’s pledged security against being diverted before the process of pursuing the borrower’s assets is completed, even as they compel the lenders to first go after the principal borrower.

This will protect the rights of the lender and ensure that the integrity of the market is not compromised while also reining in rogue borrowers.