Bill shielding loan guarantors from asset auction collapses

Parliament in session
Parliament in session. FILE PHOTO | NMG 

A Bill that sought to compel creditors to seize assets of defaulting borrowers before touching a guarantor’s property has collapsed due to a quorum hitch in Parliament.

Parliament had approved the Bill that looked set to shake up the lending market, but President Uhuru Kenyatta refused to assent to it.

To overturn Mr Kenyatta’s rejection of the Bill, a two-thirds majority or 233 Members of Parliament were required to be present for the voting.

Tuesday, only 28 MPs were present in the House during voting on Mr Kenyatta’s memo.

The Bill, sponsored by Juja MP Francis Waititu, sought to amend Section 3 of the Law of Contract Act, which stipulates the rules for signing of such agreements.


The Law of Contract (Amendment) Bill, 2019, proposed that in case of a default by the principal borrower, the creditor should first auction the assets of the former before seizing the property of guarantors.

The Justice and Legal Affairs Committee backed the Bill with a minor amendment to restrict the application to contracts signed after the date the law came into force.

MPs unanimously supported the proposed legislation.

The Bill sought to end the current case where creditors see guarantors’ property as the low hanging fruit in their bid to collect bad loans.

Mr Kenyatta rejected clause 2(1) of the Bill that stipulates that before a suit is brought against a defendant, the plaintiff shall first realise the assets of the principal.

“The proposed new provisions to section 3 of the Law of Contract Act will 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,” Mr Kenyatta said in the memo.

He said the amendment was likely to adversely affect creditors and may provide a statutory loophole that enables guarantors who provide third-party security to divert assets that have been pledged as security during the period when lenders are pursuing the principals’ assets through the courts.

“The proposed provisions are likely to adversely affect credit advanced to micro, small and medium enterprises due to lender’s reluctance to rely on third-party collateral,” added the President.

The latest data from the Central Bank of Kenya (CBK) show default on personal loans have nearly doubled over the past three years to Sh52.3 billion.

The CBK data show that defaults from unsecured lending jumped Sh3.6 billion in the three months to June, the biggest increase compared to other segments such as mortgage, trade and manufacturing.

The mounting defaults are a reflection of the struggles that borrowers are facing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as companies intensify austerity measures to protect profits and freeze hiring plans.

This has seen workers who took loans on the strength of their pay slips default as they struggle to secure new jobs.