Can Microfinance Institutions Charge and Auction Property in Kenya? - A Concise Legal Overview for Practitioners and Financial Sector Stakeholders

Introduction

The growth of microfinance lending in Kenya has led to increased reliance on property — particularly land and buildings — as collateral for loan facilities. A recurring legal question is whether microfinance institutions (MFIs) may lawfully charge and auction property upon borrower default.

The short answer is yes, but only subject to strict statutory compliance. This article provides a structured overview of the governing legal framework, key procedural requirements, and leading judicial principles.

1. Legal Authority to Charge Property

Under the Land Act, a charge is defined as an interest in land securing the payment of money or the performance of an obligation. The Act recognizes both formal and informal charges.

A valid formal charge over land must:

• Be in writing;
• Be executed and properly attested;
• Be registered under the Land Registration Act.

Registration is essential. An unregistered charge is ineffective against third parties and generally unenforceable as a statutory security.

For movable assets (e.g., livestock, machinery, vehicles), security interests are governed by the Movable Property Security Rights Act.

Microfinance institutions operating under the Microfinance Act — particularly deposit-taking MFIs regulated by the Central Bank of Kenya — are permitted to take security, including charges over land, provided they comply with applicable statutory and regulatory requirements.

2. Statutory Preconditions to Sale

The power of sale does not arise automatically upon default. It is governed primarily by Sections 90, 96, and 97 of the Land Act.

(a) Section 90 – Three-Month Statutory Notice

Where a borrower defaults, the chargee must issue a written notice:

• Specifying the nature and extent of the default;
• Stating the amount required to remedy the default;
• Giving the borrower at least three (3) months to rectify the breach;
• Informing the borrower of the consequences of non-compliance.

Failure to issue a valid Section 90 notice renders subsequent enforcement unlawful.

(b) Section 96 – Notice to Sell

If default persists after the expiry of the Section 90 notice, the chargee must issue a further 40-day notice of intention to sell before proceeding with sale.

Courts have consistently held that strict compliance with these notice provisions is mandatory.

3. Duty of Care and Valuation

Section 97 of the Land Act imposes a statutory duty of care on the chargee to obtain the best price reasonably obtainable at the time of sale.

Before exercising the power of sale, the lender must:

• Obtain a professional valuation (including forced sale value);
• Ensure the property is not sold at a gross undervalue.

In Omingo v Rafiki Microfinance Bank Limited & Another, the High Court emphasized that failure to comply with valuation requirements may amount to breach of statutory duty, exposing the lender to legal challenge.

4. Licensing and Regulatory Considerations

Deposit-taking MFIs must be licensed under the Microfinance Act and regulated by the Central Bank of Kenya. Questions have arisen in litigation where lenders conduct mortgage-like activities without appropriate regulatory authorization.

While Kenyan courts have not categorically invalidated all such charges, improper licensing may expose institutions to regulatory sanctions and enforcement challenges.

5. Borrower Protections

(a) Equity of Redemption

A borrower retains the right to redeem the property by paying the outstanding debt at any time before completion of sale. This equitable principle is reinforced by Article 40 of the Constitution of Kenya.

(b) Spousal Consent

Where the charged property constitutes matrimonial property, written spousal consent is required under the Land Registration Act and the Matrimonial Property Act. Absence of consent may invalidate the charge.

(c) Injunctive Relief

The High Court has frequently granted injunctions restraining sale where statutory notices are defective or procedural safeguards are ignored. Courts, however, are reluctant to interfere where default is admitted and the statutory process has been properly followed.

6. Judicial Approach

The Kenyan judiciary — including the High Court of Kenya and Court of Appeal of Kenya — has consistently emphasized:

• Strict adherence to statutory notice requirements;
• Protection of the borrower’s equity of redemption;
• Observance of the lender’s statutory duty of care;
• Procedural fairness in enforcement.

The courts view the statutory power of sale as a serious remedy that must be exercised within the confines of the law.

Conclusion

Microfinance institutions in Kenya are legally permitted to charge and auction property pledged as collateral. However, enforcement is strictly regulated.

To lawfully exercise the power of sale, an MFI must:

1. Ensure the charge is validly created and registered;
2. Serve compliant statutory notices under Sections 90 and 96 of the Land Act;
3. Obtain proper valuation and comply with Section 97 duty of care;
4. Respect constitutional and matrimonial property protections.

Non-compliance may result in injunctions, damages, nullification of sale, and regulatory consequences.

In Kenya’s expanding credit landscape, the enforceability of microfinance securities ultimately depends not on the existence of default alone, but on rigorous adherence to statutory procedure and judicially enforced standards of fairness.

This article is intended for general informational purposes and does not constitute legal advice.