Microfinance Institutions and the Charging of Property in Kenya: A Comprehensive Legal Brief for Public Awareness

Overview

In Kenya’s expanding credit market, microfinance institutions (MFIs) increasingly require borrowers to pledge property — particularly land and buildings — as security for loans. A common public concern is whether such institutions can lawfully charge and auction property in the event of default.

Under Kenyan law, the answer is yes, provided strict legal procedures are followed. This brief explains the governing legal framework, enforcement process, borrower safeguards, and the consequences of non-compliance.

1. Legal Basis for Charging Property

What is a Charge?

A charge is a legal interest created over property to secure repayment of a debt. It does not transfer ownership to the lender but gives the lender a right to recover the loan from the property if the borrower defaults.

Charges over land are primarily governed by:

• Land Act
• Land Registration Act

Security over movable assets (such as vehicles, livestock, or machinery) is regulated under the Movable Property Security Rights Act.

Microfinance institutions operate under the Microfinance Act and, where deposit-taking, are regulated by the Central Bank of Kenya.

2. Can Microfinance Institutions Legally Charge Property?

Yes. Kenyan law allows MFIs to accept property as collateral, including land and buildings, so long as:

• The borrower voluntarily consents;
• The charge instrument is properly executed;
• The charge is registered at the relevant Land Registry; and
• The institution complies with applicable regulatory requirements.

Registration is critical. Without registration, a charge over land cannot be enforced against third parties.

Courts have affirmed that once a valid charge is created and registered, the lender acquires statutory rights of enforcement in the event of default.

3. When Can Property Be Auctioned?

An MFI cannot seize or sell property arbitrarily. The right to sell arises only after strict compliance with statutory procedures under the Land Act.

(a) Default Must Occur

The borrower must be in default — typically through failure to make loan repayments or breach of contractual terms.

(b) Three-Month Statutory Notice (Section 90, Land Act)

Before any sale, the lender must issue a written notice giving the borrower at least three months to remedy the default. The notice must clearly state:

• The nature of the default;
• The amount required to correct it;
• The consequences of failing to comply.

If this notice is defective or not served, the sale process becomes unlawful.

(c) Forty-Day Notice to Sell (Section 96, Land Act)

If the borrower does not remedy the default within three months, the lender must issue a further 40-day notice of intention to sell before proceeding with auction.

Both notices are mandatory. Courts consistently invalidate sales where these steps are not followed.

4. Duty of Care and Valuation

Section 97 of the Land Act imposes a legal obligation on the lender to:

• Obtain a professional valuation before sale;
• Ensure the property is sold at the best reasonably obtainable price.

In Omingo v Rafiki Microfinance Bank Limited & Another, the High Court emphasized that failure to obtain proper valuation may breach the statutory duty of care and expose the lender to liability.

Selling property at a gross undervalue may result in the sale being challenged or damages awarded.

5. Borrower Protections

Kenyan law provides important safeguards for borrowers:

(a) Right of Redemption

Even after default, the borrower retains the right to redeem the property by paying the outstanding debt before the sale is finalized. This principle is protected under Article 40 of the Constitution of Kenya.

(b) Spousal Consent for Matrimonial Property

If the property is matrimonial property, written consent from the spouse is required before it can be charged. Absence of such consent may render the charge invalid.

(c) Right to Challenge Irregular Sales

Borrowers may seek relief from the High Court of Kenya where:

• Statutory notices were not properly served;
• Valuation was not conducted;
• The sale process was irregular;
• The property was sold at a gross undervalue.

Courts generally do not stop a sale merely because a borrower is in financial difficulty. However, procedural defects are taken seriously and often result in injunctions.

6. Regulatory Considerations

Deposit-taking MFIs must be properly licensed and regulated by the Central Bank of Kenya. Institutions acting outside their regulatory mandate may face sanctions or enforcement challenges.

Proper licensing strengthens the enforceability of security rights and protects both lenders and borrowers within the financial system.

7. Key Takeaways for the Public

For Borrowers:

• Ensure you understand the terms before signing a charge document.
• Confirm whether the property is matrimonial and whether spousal consent is required.
• Act promptly if you receive a statutory notice.
• Seek legal advice immediately if procedures appear irregular.

For Microfinance Institutions:

• Ensure charges are properly drafted and registered.
• Strictly comply with statutory notice timelines.
• Obtain professional valuations before sale.
• Maintain documentary evidence of compliance.

Conclusion

Microfinance institutions in Kenya are legally permitted to charge and auction property used as collateral. However, this power is not absolute. It is subject to clear statutory safeguards designed to balance the lender’s right to recover debt with the borrower’s constitutional property rights.

Any sale conducted without compliance with the Land Act’s notice requirements, valuation obligations, and procedural safeguards may be declared unlawful.

Public awareness of these legal standards is essential to ensuring fairness, accountability, and transparency in Kenya’s credit market.

This brief is intended for general public information and does not constitute legal advice.