Kenyan Loan Agreements: The Security That Actually Gets Enforced

Lenders negotiate covenants for weeks and lose their security to a filing deadline. It is the single most expensive administrative failure in Kenyan finance practice, and it is entirely preventable.

This article covers the security available under Kenyan law, what makes each enforceable, and the documentation points that decide whether a facility performs when it is tested.

What security is available?

Charge over land

The principal security for real estate lending, registered against the title under the Land Act. It confers a statutory power of sale on default, exercisable after prescribed notices. A charge is only effective once registered, and priority runs by date of registration.

Debenture over company assets

A fixed charge over identified assets and a floating charge over the rest of the company's undertaking. The floating charge crystallises on default or on the appointment of a receiver, converting into a fixed charge over the assets then held. Registrable at the Companies Registry.

Chattels mortgage

Over movable property, registered under the Movable Property Security Rights Act, which established a unified collateral registry. This regime materially improved Kenyan secured lending against equipment, receivables and inventory.

Personal and corporate guarantees

A contractual promise to answer for another's debt. Whether the guarantor can be pursued immediately or only after the lender has exhausted remedies against the borrower depends on whether the guarantee is drafted as a primary or secondary obligation — a distinction guarantors frequently do not appreciate until it matters.

Share pledges and assignments

Security over shares in the borrower or a group company, and assignment of receivables, insurance proceeds or contractual rights.

Registration: the point everything turns on

Every form of security has a registration requirement and a deadline, and the consequence of missing it is not a penalty but invalidity.

A charge created by a company must be registered at the Companies Registry within the statutory period. An unregistered charge is void against a liquidator and against other creditors. The lender becomes an unsecured creditor of a company in liquidation, which is functionally the same as having no security at all.

Charges over land must be registered at the Lands Registry to be effective, and priority between competing charges follows registration date rather than creation date.

Movable security is perfected by registration at the collateral registry, which also determines priority.

Registration should be a named completion item with a named owner, not an assumption that the other side's lawyers are handling it. Our banking, finance and fintech practice treats it as a condition subsequent with a diarised deadline for exactly this reason.

The facility agreement: what actually matters

Conditions precedent. What must be delivered before drawdown — corporate authorisations, security documents, searches, insurance, valuations, legal opinions. A borrower who has not read the CP list discovers at the eleventh hour that a document takes three weeks to obtain.

Representations and warranties. Statements of fact at signing and, usually, repeated at each drawdown and interest payment date. A representation that becomes untrue can trigger default even where the borrower is paying.

Financial covenants. Debt service coverage, leverage, current ratio. These should be set against the borrower's realistic projections with headroom, not against a best case. Covenants set too tight produce technical defaults during ordinary trading variation.

Information covenants. Audited accounts within a period, management accounts, compliance certificates. Late delivery is a default in most facilities and is the most commonly breached covenant of all.

Events of default. Non-payment, covenant breach, cross-default, insolvency, material adverse change. Cross-default deserves particular attention: it converts a dispute with one lender into a default with all of them. Negotiate a threshold so that trivial defaults elsewhere do not accelerate this facility.

Material adverse change. Broadly drafted, it gives the lender wide discretion to accelerate. Borrowers should press for objective definition.

Enforcement: the statutory power of sale

A chargee's power of sale over land is not exercisable at will. The Land Act prescribes notices, and the procedure is strictly construed.

The chargee must serve a notice of default giving the chargor a period to remedy, followed by a statutory notice before the power of sale becomes exercisable. The property must then be sold by public auction, following valuation and advertisement, and the chargee owes a duty to obtain the best price reasonably obtainable.

Sales conducted without valid notices are regularly set aside, which affects purchasers at auction as much as borrowers. A buyer at a chargee sale should verify the notices were properly served before bidding, because the risk of the sale being unwound sits with them.

Guarantees: the traps for guarantors

A director signing a personal guarantee for company borrowing frequently does not appreciate the exposure.

Check whether the guarantee is all monies — covering all present and future liabilities of the borrower, not just this facility — because most bank guarantees are. Check whether it is capped, and whether it covers interest and enforcement costs on top of principal. Check whether it is primary, allowing the lender to pursue the guarantor without first exhausting remedies against the borrower.

Check the release mechanism. A guarantee typically continues until formally released in writing, so a director who resigns and sells their shares may remain liable for borrowing incurred years later.

Where there are several guarantors, liability is usually joint and several — the lender may pursue any one for the whole amount, leaving that guarantor to seek contribution from the others.

Regulatory considerations

Lenders licensed by the Central Bank are subject to prudential requirements, and the regulatory framework has shifted toward governance and anti-money-laundering compliance as much as capital adequacy.

Digital credit providers now require CBK licensing, a change that brought a substantial part of the Kenyan lending market into the regulatory perimeter.

Consumer protection rules affect disclosure and interest presentation. And for cross-border facilities, withholding tax on interest paid to a non-resident lender must be modelled, with treaty relief claimed correctly where available. Our tax practice runs that analysis before the pricing is fixed, since an unmodelled withholding obligation changes the effective cost materially.

Intercreditor and priority arrangements

Where more than one lender takes security over the same borrower, the ranking between them is a negotiation rather than an automatic result.

Priority between registered charges over land follows date of registration, which is why a lender who takes security and registers late may find itself behind a lender who documented later but filed first. The same principle applies to the collateral registry for movable security.

An intercreditor agreement regulates the relationship: who ranks where, who may enforce and in what circumstances, how proceeds are shared, and whether a junior creditor must stand still while the senior enforces. Without one, competing lenders enforce against the same assets simultaneously and value is destroyed in the process.

Borrowers should note that senior lenders frequently prohibit further security without consent. Granting a second charge in breach of a negative pledge is an event of default, and lenders do enforce on it. Check the existing facility before offering security to anyone else.

Refinancing and release

On refinancing, the outgoing lender's security must be formally discharged and the discharge registered. A charge that remains on the register after the debt is repaid clouds the title and will block a future sale.

The mechanism is a redemption statement from the outgoing lender, payment of the redemption figure directly to them, and delivery of an executed discharge for registration. Borrowers should confirm the discharge is actually registered rather than assume it, because unregistered discharges surface years later at the worst moment.

What borrowers should negotiate

Realistic covenant headroom against actual projections. A cure period for covenant breach before default. A cross-default threshold rather than an open trigger. Objective definition of material adverse change. Clarity on which fees are payable if the facility does not draw. And confirmation of who bears the lender's legal costs, which in Kenyan practice is almost always the borrower.

Sector-specific lending points

Property development finance. Drawn in tranches against certified construction progress, with the site charged and often a charge over the development company's shares. Lenders require step-in rights allowing them to complete the project if the developer fails, and those rights are only useful if the building contract permits novation to the lender.

Asset and equipment finance. Secured by chattels mortgage registered at the collateral registry, or structured as a lease or hire purchase where title remains with the financier until the final payment. The distinction matters on the borrower's insolvency: leased equipment is not part of the estate.

Working capital and invoice finance. Security over receivables by assignment, with notice to the underlying debtors determining priority. Undisclosed assignments are weaker.

SACCO lending. Governed by its own regulatory framework, with member guarantees rather than conventional security in many cases. Enforcement against guarantor members follows a different route from bank enforcement.

What lenders should insist on

Security registered within the statutory period, with the filing evidenced. Insurance over charged assets with the lender's interest noted. Valuations from a valuer the lender accepts. Corporate authorisations confirming the borrower had power to borrow and grant security. And a legal opinion where the structure has any complexity.

If you are documenting a facility — on either side — the registration deadline is the item to protect above all others. Our corporate law team handles the authorisations and our finance practice the security package; speak to us before drawdown rather than after a defect emerges.