The High Court of Kenya has held, in Rei-Iman v Succeed Capital Ltd (Rei-Iman), that a lender operating without a licence under the Banking Act lacks the legal capacity, or locus standi, to institute or maintain proceedings to recover loan monies. The Court found that the lender was not licensed as a bank, microfinance institution or other financial institution, and, on that basis, set aside the Small Claims Court judgment entered in its favour.

The ruling confirms that a judgment obtained by an unlicensed lender is a nullity, reinforcing the licensing requirements under the Banking Act. Lenders operating in Kenya without the requisite Central Bank of Kenya (CBK) licence risk being unable to enforce their loans or pursue recovery through courts, underscoring the need for careful structuring and regulatory due diligence.

Background

The dispute arose from a short-term loan advanced by Succeed Capital Ltd (Succeed Capital) to Mohammed Asif Rei-Iman (Mr Rei-Iman) under a loan agreement. Mr Rei-Iman argued that he had agreed to a fixed interest charge, whereas Succeed Capital demanded a significantly higher sum which Mr Rei-Iman contended was wholly comprised of unlawful and unconscionable interest.

Succeed Capital sued Mr Rei-Iman in the Small Claims Court at Nairobi and obtained a judgement in its favour. Mr Rei-Iman appealed to the High Court, arguing, among other things, that the trial court had failed to interrogate Succeed Capital’s legal capacity to lend money.

The legal issue – Capacity of unlicensed lenders to sue

Central to the appeal was whether Succeed Capital had the legal standing to sue Mr Rei-Iman. Mr Rei-Iman submitted that Succeed Capital was not a licensed bank, microfinance institution or financial institution under the Banking Act or the Microfinance Act. He further argued that section 3 of the Banking Act requires any person or entity carrying on banking or financial business in Kenya to be licensed by the CBK. On this basis, he argued that the trial court ought to have applied established principles on illegality, unconscionability and public policy, which preclude courts from assisting parties seeking to benefit from unlawful contracts. Succeed Capital maintained that a valid loan agreement had been concluded and that Mr Rei-Iman was bound by the terms he had signed.

The High Court’s decision

The Court accepted Mr Rei-Iman’s submission that Succeed Capital was not licensed as a bank, microfinance institution or financial institution, and held that section 3 of the Banking Act required it to be licensed by the CBK before carrying on banking or financial business in Kenya.

On that footing, the Court held that Succeed Capital lacked the legal standing to institute or otherwise engage the court for redress. The Court allowed the appeal, set aside the judgment and decree of the Small Claims Court, and substituted an order dismissing Succeed Capital’s suit with costs.

Regulatory and public policy implications

The Court was explicit that allowing an unlicensed person or entity to conduct business akin to that of a bank would be contrary to public policy, and that it is the duty of the courts to guard against this. This reasoning situates the decision within a broader line of authority under which illegal contracts (that is, agreements that contravene statute or public policy) are treated as void and unenforceable, notwithstanding that a party may otherwise be bound by their signature on a document. By denying an unlicensed lender access to the courts to enforce its loan claims, the decision gives practical effect to the licensing requirements of the Banking Act, rather than leaving them to be enforced only through CBK supervisory or enforcement action.

The Rei-Iman decision also sits alongside Kenya’s evolving framework for non-deposit-taking credit providers. The Central Bank of Kenya Act (CBK Act) now establishes a licensing and prudential supervision regime for entities that extend credit but do not take deposits from the public. It requires any person carrying on non-deposit-taking credit business to obtain a licence from the CBK. It broadly defines ‘non-deposit taking credit businesses’ to include the granting of loans or credit facilities (whether digitally or otherwise), asset financing, buy now pay later arrangements, credit guarantees, peer to peer lending, and any other activity the CBK may determine. However, the implementing regulations required to operationalise this framework are yet to be enacted.

Practical significance for lenders and financial institutions

• Deal structuring and enforcement rights: Lenders extending credit to Kenyan borrowers should carefully consider whether their lending activities could be characterised as carrying on banking, financial or non-deposit taking credit provider business in Kenya. Where there is a risk that the lender’s activities may fall within the scope of regulated activities, lenders should consider structuring arrangements through licensed Kenyan intermediaries or ensuring that the transaction is clearly governed by a foreign law and subject to foreign jurisdiction to the extent permissible.
• Regulatory exposure: The decision raises the question of what constitutes carrying on banking, financial or other regulated business in Kenya. While foreign lenders extending cross-border credit facilities to Kenyan borrowers may argue that they are not carrying on business in Kenya, it is prudent to obtain legal advice on the characterisation of each transaction, particularly where the lender has a physical presence in Kenya, takes security over Kenyan assets, or engages in repeated lending to Kenyan counterparties.
• Loan book acquisitions and participations: Lenders financing or acquiring loan books originated by third-party lenders in Kenya should undertake enhanced diligence on the originator’s licensing status. If the originator was not properly licensed at the time of origination, the underlying receivables may be unenforceable, exposing the acquirer or participant to significant credit and recovery risk.
• Security enforcement: Lenders holding security over Kenyan assets should be aware that the capacity defect identified in Rei-Iman is not limited to unsecured claims. If a lender lacks capacity to sue to recover the underlying debt, it may equally lack capacity to enforce security interests or pursue guarantors through the Kenyan courts, regardless of the strength of its security package.

The High Court’s ruling serves as a timely reminder that regulatory compliance is fundamental to the enforceability of lending arrangements in Kenya. This ruling has important implications for lenders, financiers and investors alike, particularly where lending activities may fall within the scope of Kenya’s licensing regime. As the regulatory landscape continues to develop, careful consideration of licensing and enforcement risks will remain critical.

Written by Dominic Indokhomi, Partner and Wambui Kelemba, Associate, Bowmans Kenya