Uncertainty undermines Kenya’s foreign lending

Most of the funds involved in foreign lending are typically subject to rigorous regulation in their respective jurisdictions, often classified as alternative investment funds or other forms of financial institutions.

Foreign funds investing in Kenya will usually do so within a cross-border framework and with the transactions being subject to various agreements and instruments.

These documents may be governed under Kenyan law or foreign law depending on the wishes of the parties. Particularly for debt transactions, it is common for the facilities advanced to be secured by instruments rooted in Kenyan statutes.

For foreign debt funds, enforceability of these instruments especially in the event of a default by a borrower is quite critical. Clarity and certainty in statutory and regulatory provisions as well as confidence in the judicial system are essential.

This is especially so since loan documentation by a foreign lender may be governed by different legal systems, and where Kenyan courts will be involved, a lender would want to be certain that the outcomes of such proceedings will be favourable toward recovery.

Notably, such proceedings may either be originated in Kenya or Kenyan courts may be involved as part of proceedings to recognise a foreign judgement or arbitral award. Either way, interaction with the Kenyan judicial system may be inevitable.

The challenge arises where statutory or regulatory provisions relevant to enforcement are unclear and open to conflicting judicial interpretation.

One such example is Section 974 of the Companies Act (Cap 486) which provides that a foreign company may not “carry on business” unless it is registered in Kenya as such.

The meaning of “carrying on business” has not been specifically defined other than that it includes offering debentures in Kenya or acting as a guarantor to debentures offered in Kenya.

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Section 974 of the Companies Act was the subject of Stichting Rabo Bank Foundation vs Ava Chem Limited & Another [2024] KEHC 9931 (KLR) (the Rabo Case), in which the court held that the plaintiff ought to have been registered as a foreign company under Section 974 to have the requisite locus standi to institute legal proceedings against the defendant.

Although an appeal to the ruling has been filed, if upheld, this decision is likely to discourage foreign lenders from participating in cross-border loan origination within the country.

Foreign lenders may be reluctant to register foreign companies in Kenya under Section 974 given that some transactions may be one off and funds may not want to have a physical presence in Kenya or have any operational activity in-country.

Ultimately, such registration may lead to additional compliance requirements which most foreign debt funds may find a bit onerous.

Rubbing salt into the wound, in December 2024, the Business Laws (Amendment Act) 2024 introduced key amendments to the Central Bank of Kenya Act (Cap 491) and the Microfinance Act (Cap 493C) expanding regulatory oversight of the Central Bank of Kenya (CBK) to cover a broad range of financial institutions.

Part of the key amendments include extending regulatory obligations, previously limited to digital credit providers, to encompass all non-deposit taking lending businesses, whether operating digitally or through other means.

The amended law does not specifically carve out foreign lenders and as a result, there is a risk that foreign lending entities may inadvertently be caught within the scope of licensing requirements introduced by these amendments, and potentially further exposing them to even more onerous compliance requirements.

Given the uncertainty, there’s also the risk that enforcement proceedings by an unlicensed foreign lender in Kenyan courts may suffer the same fate as the plaintiff in the Rabo Case.

The possibility that recognition of a foreign judgment or an arbitral award by an unlicensed foreign lender may fail on account of violating public policy cannot also be ruled out.

Cross-border lending constitutes a distinct class of financial transactions, and the law should therefore treat it as such. A sound legal framework in relation to cross border lending should prioritise clarity, openness and minimal regulatory friction to facilitate foreign investment in the country.

Where licensing is necessary, it should take the form of a “mini license” or exemption that is easy to obtain, especially where the foreign fund is already sufficiently subject to regulations in the jurisdiction where it is domiciled.

Kenya must strive to provide legal and regulatory certainty to foreign lenders, particularly given their critical role in supporting the entrepreneurial ecosystem and their ability to provide capital where conventional banking and the capital markets may fall short.

The writer is Associate, G&A Advocates LLP