Non- Compliance: Court Dismisses 139 Lodged By Digital Lenders

Non-compliance comes at a steep price. As discussed in our previous article link, all non-deposit-taking credit providers are now required to obtain a license from the Central Bank of Kenya. Operating without this license not only puts a lender at risk of legal and financial penalties but also undermines their ability to register collateral or enforce pledged security, leaving them exposed to significant losses.

Loan defaulters are not an uncommon phenomenon when it comes to the business of credit providers. Because of the minimal vetting and the ease with which credit is obtained, this problem is even more compounded with non-deposit taking credit providers and more so, digital credit providers. To mitigate this risk, many of these credit providers secure their loans by registering a charge (whether formal or informal) against collaterals such car logbooks, land amongst other classes of assets to ensure that the interests of the credit providers are protected.

Unlicensed NDT credit providers have in the recent past been facing quite a number of challenges with respect to this. A number of land registries have refused to accept applications from NDT credit providers to register charges as the entities cannot provide a license showing they have authority to issue the loans in the manner they do. More recently, the courts have held that unlicensed lenders cannot exercise their right of statutory power of sale against defaulters.

In this article, we analyze some of these cases and what the ruling means to non-deposit taking credit providers.

1. Brief summary of the case

In the case SCCOMM/E9994/2025 – M-Collect Limited v. Mbana Kalua, the claimant filed a suit against the respondent for an unpaid loan. The case was one of 139 other claims filed against loan defaulters.

During the ruling, the court raised serious concerns regarding the operations of many of the credit providers. Specifically, the court sought to establish whether the claimants had satisfied the requirements under Section 33S of the CBK Act. Section 33S of the CBK Act stipulates that no person may operate a non-deposit-taking credit business without being licensed by the Bank, or unless permitted by other laws. Applications for such licenses must be submitted with prescribed

information and fees. Violating this provision is an offense, punishable by up to three years imprisonment, a fine of up to five million shillings, or both.

After a thorough review, the court found that the claimants were misusing judicial processes by filing claims without meeting the required regulatory standards. Consequently, they were unable to recover the funds they had lent through legal proceedings.

2. Aventus Technology Limited: A Case of Non-Conformity

Among the claimants, Aventus Technology Limited, a digital lender, was singled out for operating without the requisite CBK authorization. During the hearing, Donald Nyaga, representing the firm, struggled to demonstrate compliance with the law. In his ruling, Hon. Kagenyo noted as follows:

“As it stands, Aventus Technology Limited is operating in non-conformity with the dictates of the regulating authority, and the court cannot dignify an illegality by presiding over such matters.”

Consequently, all 139 cases filed by Aventus Technology Limited and other unregistered lenders were dismissed, reinforcing the judiciary’s commitment to uphold regulatory compliance within the financial sector.

3. Conclusion

As stated above, non-compliance is expensive. Not only does the credit provider risk losing both principal and interest, but they also face significant financial and legal consequences for operating outside the law. According to the Central Bank of Kenya (CBK), as of November 2024, nearly 14 million accounts had been flagged for defaulting on digital loans. CBK estimates that lenders lose approximately $1,200 per person each month in unpaid loan interest. Without the ability to enforce debt recovery through the courts due to non-compliance with licensing requirements, unregistered lenders stand to lose even more, further exacerbating their financial risks.

This ruling serves as a stark warning to non-compliant money lenders, highlighting the serious risks associated with failing to obtain the necessary CBK licensing. Unlicensed lenders are liable to pay to hefty penalties. Under the Business Laws (Amendment) Act, 2024, non-deposit-taking credit providers can be fined up to KSh. 20 million or three times the financial gain from

non-compliance, whichever is higher. Individuals found in breach may also face fines of up to KSh. 1 million. These severe penalties underscore the government’s commitment to ensuring that all financial service providers operate within the regulatory framework.

Ultimately, the cost of non-compliance extends far beyond lost revenue—it threatens the financial viability and legal standing of unregistered lenders. The only way to avoid these risks is to obtain proper licensing and adhere to CBK regulations.

HOW WE CAN HELP

At CM Advocates LLP, we understand the complexities of regulatory compliance and are dedicated to ensuring that your business remains fully aligned with legal requirements. Our expert team provides:

· Legal advisory services to help businesses interpret and implement the latest regulatory changes.

· Assistance with licensing and registration with the Central Bank of Kenya and other regulatory authorities.

· Policy formulation and compliance audits to help businesses avoid hefty fines and legal disputes.

The legal landscape for credit providers is evolving rapidly, and failure to comply could result in severe financial and legal repercussions. Let us be your trusted partner in navigating the complexities of business regulation. Visit us today or explore our services online at www.CMAdvocates.com. For any clarifications regarding the foregoing or any of our other offering please contact the contributors through the emails below or the team through commercial@cmadvocates.com

Contributors:

1. Victorine Rotich – Senior Associate

2. Brian Thuranira – Legal Assistant