Milimani Court Deals Major Blow to Unlicensed Digital Lenders as Judge Refuses to Enforce KSh500,000 Debt Claim
A Kenyan court has delivered a landmark ruling that could significantly reshape the country’s digital lending sector after refusing to enforce a loan issued by an unlicensed lender, declaring that businesses operating without approval from the Central Bank of Kenya (CBK) cannot rely on the courts to recover debts.
The decision, delivered by the Milimani Small Claims Court on July 17, is expected to have far-reaching implications for digital credit providers operating outside Kenya’s regulatory framework.
In the ruling, the court held that lenders conducting financial business without the mandatory CBK licence are engaging in an illegal enterprise and cannot seek the protection of the courts to enforce contracts arising from those unlawful activities.
The KSh213,500 Loan at the Centre of the Dispute
The dispute arose after a lending company claimed it had advanced a borrower KSh213,500, with the borrower expected to repay KSh229,513 in a single instalment by April 18, 2021.
According to court documents, the loan was secured using a motor vehicle as collateral. The lender alleged that the borrower defaulted on the repayment, leaving an outstanding balance of approximately KSh85,000, which it claimed had later ballooned to nearly KSh500,000 due to accumulated charges.
The company further argued that it had been unable to recover the debt by selling the vehicle because a registered caveat prevented its disposal.
However, before determining whether the borrower owed the claimed amount, the court turned its attention to a more fundamental legal question—whether the lender itself had the legal authority to institute the proceedings.
Court Finds Lender Was Operating Illegally
Upon reviewing the evidence, the magistrate established that the claimant was not licensed by the Central Bank of Kenya as a digital credit provider, despite engaging in lending activities.
The court ruled that this failure rendered the lender’s business unlawful under Kenyan law, making its claim unenforceable.
Quoting Section 3 of the Banking Act (Cap 488), the magistrate observed that any individual or entity carrying out banking or financial business in Kenya must first obtain the appropriate licence from the Central Bank.
“Before delving into the merits of the case, I have considered the court record and note that the claimant is not licensed as a digital credit lender by CBK. Section 3 of the Banking Act (Cap 488) requires all persons or entities carrying out banking or financial business in Kenya to be licensed by the Central Bank of Kenya. It then follows that conducting lending business without such licensing amounts to an illegality and economic risk,” the magistrate ruled.
The court consequently dismissed the claim without proceeding to determine the merits of the alleged debt.
Major Victory for Borrowers
The judgment is widely expected to strengthen consumer protection by limiting the ability of unlicensed lenders to use the judicial system to pursue borrowers.
Legal observers say the ruling reinforces the principle that courts cannot assist parties seeking to benefit from activities conducted in violation of the law.
For borrowers, the decision provides an important legal safeguard against debt recovery suits filed by digital lenders operating outside Kenya’s licensing framework.
At the same time, the ruling serves as a stern warning to lenders that regulatory compliance is not optional if they wish to enforce lending agreements through the courts.
CBK Intensifies Crackdown on Illegal Loan Apps
The judgment comes just days after the Central Bank of Kenya intensified its campaign against unlicensed digital lenders, urging members of the public to report illegal mobile loan applications operating without regulatory approval.
Kenya introduced sweeping reforms to the digital lending sector after concerns over predatory lending practices, excessive interest rates, harassment of borrowers, and misuse of personal data by mobile loan applications.
The legal framework, introduced in December 2021, brought digital credit providers under the direct supervision of the CBK, with licensing requirements becoming operational in April 2022.
Since then, the regulator has licensed 252 digital credit providers from more than 800 applications, marking one of the country’s most significant reforms in the fast-growing mobile lending industry.
The Milimani court’s ruling is now expected to reinforce those reforms by making it clear that lenders operating outside the law risk not only regulatory sanctions but also losing the ability to enforce their loan agreements through Kenya’s courts.
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