Unlicensed Digital Lenders Barred From Suing Defaulters, Court Rules
The judgment reinforces the regulatory framework introduced in 2022 when Parliament amended the law to place Digital Credit Providers under CBK supervision.
Photo: Courtesy.
By Zuriel Midambo
Digital lenders operating without a licence from the Central Bank of Kenya cannot turn to the courts to recover unpaid loans, a Kenyan court has ruled in a decision set to reshape the country’s multi-billion-shilling digital credit industry.
In the ruling, the court found that a lender that has failed to obtain mandatory licensing under the Central Bank of Kenya Act cannot enforce loan contracts through the judicial system. The principle, the court held, is simple: an entity that flouts the law cannot seek protection from the same law to enforce its agreements.
The judgment reinforces the regulatory framework introduced in 2022 when Parliament amended the law to place Digital Credit Providers under CBK supervision. The move was prompted by mounting public complaints over debt shaming, intrusive data harvesting, exorbitant interest rates and aggressive recovery tactics by unregulated mobile loan applications.
Under the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022, all lenders offering credit through digital platforms — including mobile apps, USSD codes and websites — must be licensed by the CBK. The licence requires lenders to disclose loan terms, cap non-performing loan penalties, protect customer data and adhere to approved debt collection practices.
According to legal analysts, the court’s position closes a loophole that unlicensed operators have exploited for years — disbursing loans illegally but rushing to court when borrowers default.
“What the court is saying is that legality is a prerequisite for enforceability. You cannot benefit from an illegality,” said one Nairobi financial services lawyer.
The implications are significant. While borrowers still have a contractual obligation to repay money borrowed, unlicensed lenders will now find it difficult to obtain court judgments, garnish wages or use auctioneers to seize property until they regularize their operations.
The ruling is expected to accelerate compliance in the sector. By mid-2025, the CBK had received more than 700 applications for digital credit licences and had approved just over 120. Dozens of applications were rejected for failing to meet requirements on capital, data protection and shareholder suitability, yet many of those firms continued to operate.
For consumers, the decision offers additional protection but is not a free pass to default. Lawyers caution that borrowers who took loans from licensed lenders remain fully liable and can still be sued, listed with Credit Reference Bureaus or have their collateral recovered through lawful means. Deliberate default, even on loans from unlicensed lenders, could also expose borrowers to other civil claims once the lender obtains a licence.
CBK Governor Dr. Kamau Thugge has repeatedly warned Kenyans to confirm the licensing status of a digital lender before borrowing, saying only licensed entities are subject to ongoing supervision and consumer redress mechanisms.
Industry players say the ruling could help restore public trust in digital lending by driving out rogue operators and leaving a smaller but more responsible and transparent market that can continue to serve millions of Kenyans who depend on mobile loans for emergencies, school fees and working capital.
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