CAN MICROFINANCE INSTITUTIONS CHARGE AND AUCTION PROPERTY IN KENYA? - An in-depth legal analysis under Kenyan law

Intro

Microfinance institutions in Kenya may take security over property — including land and, where applicable, movable assets — to secure loans. However, the legitimacy of those security interests and enforcement actions turns on compliance with specific statutory frameworks and judicial pronouncements.

This article examines:

1. When and how MFIs can take property as security;
2. Legal requirements for enforcing security against default;
3. Borrower protections under statute and case law;
4. Jurisdictional and regulatory constraints; and
5. Practical compliance guidance.

1. Legal Foundations for Charging Property in Kenya

1.1 Charges Defined and Recognised

Under the Land Act (the Land Act), a “charge” over land is defined as an interest in land securing the repayment of money or performance of an obligation. It includes both formal and informal charges.

• Formal charge: Requires execution of a written instrument and registration as an encumbrance at the Lands Registry.
• Informal charge: A written and witnessed undertaking accepted by the chargor with clear intention to create security; enforceable only with the leave of court unless otherwise specified by law.

For movable assets (e.g., machinery, livestock), the Movable Property Security Rights Act governs creation and registration of security rights, enhancing clarity and enforcement for non-land collateral.

2. Can Microfinance Institutions Legally Take Property as Security?

2.1 General Authority to Take Security

There is no express prohibition in Kenyan law preventing MFIs from taking security over land or movable property provided:

• The chargor voluntarily offers the property as collateral;
• The instrument complies with statutory form and registration requirements; and
• The creditor adheres to regulatory obligations, where applicable.

In Rafiki Microfinance Bank Ltd v John & Another the High Court highlighted the statutory requirements for completing a charge — including registration and compliance with Land Act formalities — as conditions precedent to enforceability.

2.2 Licensing and Mortgage Business

While MFIs can take security, lenders not licensed to conduct mortgage finance business may face regulatory challenges. Recent commentary suggests a tension between the regulatory requirements under the Banking Act — which restricts unlicensed entities from conducting mortgage finance business — and usual practice in the microfinance sector. 

This has resulted in litigation challenging the legality of certain charges, though courts have not uniformly disallowed all unlicensed charging practices so long as statutory requirements are met. The licensing question remains an emerging area of regulatory jurisprudence.

3. Enforcement: When and How Property Can Be Sold

The power to sell charged property is not automatic upon default. It must follow strict statutory procedures in the Land Act.

3.1 Statutory Notices – Sections 90 and 96 of the Land Act

Under Section 90 of the Land Act, a chargee must serve a written notice to the chargor upon default, informing them:

• of the nature and extent of the default;
• the amount payable (if a monetary default) and a minimum 3-month period to remedy same;
• consequences of continued default; and
• the right to seek court relief.

Only after expiry of the Section 90 notice may the chargee seek remedies, including sale.

Section 96 of the Land Act requires a separate notice to sell after the default period has elapsed, and the sale may not proceed until at least 40 days after service of this notice.

These timelines are mandatory preconditions to valid enforcement: failure to serve them in proper form renders any attempted sale unlawful. As the High Court explained in East Africa Ventor Co. Ltd v Agricultural Finance Co-op Ltd & another, statutory notices are essential and cannot be bypassed.

3.2 Duty of Care and Valuation — Section 97

Once the power of sale is triggered, Section 97 of the Land Act imposes a duty of care on the chargee to obtain the best price reasonably obtainable and to procure a forced sale valuation before sale.

In Omingo v Rafiki Microfinance Bank Limited & Another, the High Court applied Section 97 and held that undervaluation or irregular sale may breach the duty of care, potentially rendering the sale susceptible to challenge.

4. Jurisdiction and Procedural Considerations

4.1 Appropriate Forum

Disputes over validity of charges and enforcement proceedings lie within the High Court rather than the Environment and Land Court Act, as enforcement is a financial and contractual matter, not a land use question. In Cabro Mombasa Limited v Rafiki Microfinance Bank Limited, the court struck out an injunction application, clarifying that such disputes do not fall under Environment and Land Court jurisdiction.

5. Borrower Protections Under Kenyan Law

5.1 Spousal and Third-Party Consent

A charge over matrimonial property generally requires written spousal consent, failing which the charge may be voidable. The Land Registration Act and the Matrimonial Property Act give effect to this requirement.

5.2 Equity of Redemption

Even after default, a borrower retains the equity of redemption — the right to redeem property by paying outstanding debt before sale is concluded. The courts enforce this principle as part of constitutional property rights under Article 40 of the Constitution of Kenya.

5.3 Injunctive Relief for Procedural Irregularities

Borrowers can seek interim or permanent injunctions where enforcement processes — such as statutory notice— are defective. In Edward Kangethe Kabinga & 2 others v Kenya Women Microfinance Bank PLC, the High Court granted injunction pending proper notice service.

6. Risks and Compliance Hazards

6.1 Failure to Serve Mandatory Notices

Courts have repeatedly held that non-compliance with Sections 90 and 96 invalidates enforcement steps. Mere advertisement without proper notice will not cure the defect.

6.2 Duty of Care Violations

Selling property far below market value may constitute a breach of the duty of care under Section 97, exposing the chargee to orders setting aside the sale.

6.3 Informal Charges Without Court Approval

Where a charge is informal, statutory enforcement must be preceded by court leave under Section 79(7) of the Land Act.

7. Practical Takeaways

For Borrowers

• Insist on proof of proper statutory notice (Sections 90 & 96).
• Confirm title and spousal or third-party consents.
• Seek timely legal intervention if statutory preconditions are absent.

For MFIs

• Register all formal charges correctly at the Lands Registry and, where applicable, at the Registrar of Security Rights for movables.
• Serve statutory notices in full compliance with legislative timelines.
• Conduct updated forced sale valuations within prescribed periods.
• Document compliance rigorously to withstand judicial scrutiny.

Conclusion

Yes — microfinance institutions in Kenya may charge property and enforce it through auction sale, but only if they:

1. Comply with the Land Act’s statutory notice regime;
2. Respect valuation and duty of care requirements;
3. Adhere to jurisdictional and procedural safeguards; and
4. Ensure charges are validly created and registered.

Non-compliance attracts judicial sanctions, including injunctions and setting aside of sales, reinforcing that enforcement is rooted in due process and statutory fidelity.

This publication is intended for informational purposes for members of the legal and financial sector and does not constitute legal advice.