Loan Guarantors in Kenya: Should You Guarantee or Not?

So, you’ve joined the SACCO your friend recommended. After building up some savings, the same friend asks you to be their loan guarantor. One afternoon at your favorite four-star kiosk, “kibandaski,” they casually mention needing KES 500,000 for a project back home and ask you to guarantee KES 200,000. Without thinking, you sign the loan forms, wondering, “What could possibly go wrong?”

Months later, your salary and SACCO shares are being deducted to cover your friend’s loan, which they spent on a holiday to the Mara. You’re now left with half your salary while your friend enjoys a luxurious lifestyle.

The Big Question: Should You Guarantee a Loan?

Applicable Laws on Loan Guarantees in Kenya

Loan guarantorship in Kenya is governed by:

• The Constitution of Kenya, 2010
• The Law of Contract Act, Cap 23 (LCA)
• Case law (legal precedents)

What Does Kenyan Law Say About Guarantees?

The Law of Contract Act, Cap 23, defines a guarantee as a written promise by the guarantor to be responsible for a debtor’s obligations. Under Section 3(1) of the LCA:

“No suit shall be brought…unless the agreement…is in writing and signed by the party to be charged.”

In 2019, a proposed amendment to the LCA sought to ensure creditors first exhaust the debtor’s assets before suing the guarantor. However, the President rejected this amendment, citing concerns over its impact on credit availability for SMEs.

Rights of Loan Guarantors in Kenya Before Satisfying Debt

1. Right to Property: Guarantors have the right to retain their property and cannot be arbitrarily deprived of it.
2. Type of Guarantee: Guarantees can be “on-demand” (immediate payment) or “conditional” (payment only under certain conditions).
3. Liability: A guarantor’s liability arises only when the principal debtor defaults.
4. Right to Demand Payment: Guarantors can demand that the principal debtor pay the guaranteed debt.
5. Right to Information: Guarantors are entitled to timely and accurate updates from the creditor on the status of the loan.

Effects of Changes in Loan Terms

• Unauthorized Changes: If the creditor alters the contract without the guarantor’s consent, the guarantor may be discharged from their obligation.
• Court Rulings: Key cases, like Reid vs. National Bank of Commerce (1971), affirm the guarantor’s right to be informed of changes to the contract.

Creditor’s Duty of Good Faith Towards Guarantors

• Bad Faith by Creditors: If the creditor colludes with the principal debtor or acts in bad faith, the guarantor may be released from liability.
• Relevant Case Law: Martin Kirima Baithambu vs. Jeremiah Miriti [2017] emphasizes the importance of creditors acting in good faith.

Defenses and Remedies for Loan Guarantors in Kenya

• Variation of Contract: Unauthorized contract changes can release the guarantor from their obligations.
• Release of Security: If the creditor releases the debtor’s security without the guarantor’s consent, the guarantor may no longer be liable.

Recommendations for Guarantors in Kenya

In Kenya, the law generally favors creditors over guarantors. The rejected 2019 amendment sought to redress this by requiring creditors to pursue the debtor’s assets first. Guarantors who pay off the loan can sue the principal debtor for reimbursement under the principle of subrogation.

Before signing any loan guarantee, seek legal advice and conduct thorough due diligence. Understand the potential financial risks of guaranteeing a loan.

For more information or legal assistance regarding loan guarantees or any other legal issues, contact us at:

WKA Advocates

• Email: info@wka.co.ke
• Website: www.wka.co.ke
• Phone: +254 798 03 580
• Address: Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road, Nairobi