The government has unveiled a sweeping new law that effectively declares war on rogue digital money lenders and predatory microfinance institutions.
If enacted, the Central Bank of Kenya would have the power to cap debt recovery, block the seizure of mobile phones as collateral and send unscrupulous lenders to prison for up to three years.
The Microfinance Bill, 2026, sponsored by Majority leader Kimani Ichung’wah, comes after years of public outcry over harassment, illegal interest rates and debt-shaming tactics employed by both unlicensed and licensed lenders.
According to the Bill’s memorandum, the objective is “to provide a safe and sound environment for the microfinance banks to meet the evolving needs of the consumers.”
In what would radically change the sector, the proposed law introduces a strict limit on how much money a lender can recover from a borrower who has defaulted.
As such, the maximum amount recoverable from a debtor with respect to a non-performing loan shall be the principal owing when the loan becomes non-performing.
A lender would also be entitled to recover interest, in accordance with the contract between them and their debtors, not exceeding the principal owing when the loan became non-performing.
In plain language, a borrower who defaults on a Sh10,000 loan cannot be forced to repay more than Sh20,000 in total, inclusive of all interest and fees, regardless of how long the debt remains unpaid.
“If a loan becomes non-performing and then the debtor resumes payments on the loan and then the loan becomes non-performing again, the limits… shall be determined with respect to the time the loan last became non-performing,” the Bill reads in part.
The provision is to apply retroactively, that is, to loans that were already non-performing before the law came into force.
Perhaps the most immediate relief for millions of Kenyans who have received threatening messages from loan apps is a blanket prohibition on taking certain types of collateral.
“A person conducting a non-deposit taking business shall not take any form of deposit or cash collateral from any person,” the proposed law states.
Lenders that fail to comply would be liable, upon conviction, to imprisonment for a term not exceeding three years or to a fine not exceeding five million shillings or both.
While an institution may take land as security for a debt, it is strictly limited in what it can hold.
The clause explicitly prevents lenders from acquiring any land “except such land or interest as may be reasonably necessary for the purpose of conducting its business.”
Crucially, the provision allows a bank to hold land only in the event of default in payment of the debt, albeit seeking the opinion of the Central Bank on whether it is needed for the realisation of the debt.
Unlicensed lenders face a Sh5 million fine or three years in jail or both, with false advertising also criminalised.
The Bill also takes aim at the long-standing problem of directors and significant shareholders using microfinance banks as personal ATMs.
It prohibits an institution from granting a loan or credit facility to its associates, officers, or staff “in excess of such limits as the Central Bank may prescribe.”
Owners of microfinance banks are also reigned in, with significant shareholders, those holding more than five per cent, banned from executive director roles.
All directors will be vetted by the Central Bank and found to be ‘fit and proper’, with the regulator getting expanded surveillance powers.
“An institution shall at all times grant to the Central Bank a secure remote online access to its information technology infrastructure and information management systems.”
CBK may “view, extract or download any information” without prior notice.
If an institution is found to be “significantly undercapitalised” (defined as holding less than 50 per cent of prescribed capital), CBK can intervene in management, remove officers, prohibit bonuses, appoint a competent authority, or even close the institution and revoke its licence.
Clause 60 empowers CBK to levy monetary penalties of up to Sh1 million on institutions and Sh100,000 on natural persons for non-compliance, with additional daily penalties of up to Sh10,000.
Licensed institutions have a five-year grace period to meet the new core capital requirement of Sh250 million, as set out in the First Schedule.
The existing Microfinance Act (Cap. 493C) is repealed in its entirety, but any licence issued under the old law will continue as if granted under the new regime.
