MP moots change in law to protect loan guarantors

Creditors will have to seize all assets of the defaulting borrower before touching a guarantor’s property if amendments to the law are adopted.

A Bill sponsored by Juja MP Francis Waititu seeks to change Section 3 of the Law of Contract Act that lays rules for signing of contracts.

The move comes amid increased cases of lenders taking over guarantors’ property when borrowers default on repayment.

“…the Bill provides for amendment of section 3 of the Act to provide that before a creditor pursues a guarantor in law, he or she should first realise the assets of the principal debtor,” said Mr Waititu in the Bill.

The proposal seeks to end the current case where creditors see guarantors as hanging fruits in their bid to collect bad loans.

In January last year, for instance, President Uhuru Kenyatta’s cousin Ngengi Muigai lost a 25-year battle over his 443-acre coffee estate that Kenya Commercial Bank (KCB) #ticker:KCB sold to recover a loan.

KCB sold Mr Muigai’s Muiri Coffee Estate Limited in 2007 at a price of Sh70 million after the firm’s sister company, Benjo Amalgamated Limited, defaulted on a loan it took in 1989.

Mr Muigai alleged that KCB went ahead to sell the guarantor’s property instead of taking over what the borrower had provided as security for the loan.

In yet another case, the High Court in January 2018 allowed Barclays Bank to peg joint liability over Sh6.4 million on Network Source Ltd (principal borrower) and guarantors Echaminya Mbalani and Grace Odongo Echaminya.

The company defaulted on a Sh3.8 million loan that had accumulated interest at a rate of 17.5 percent per annum to Sh6.4 million.

The court said it was the responsibility of the guarantors to read and understand what they were signing up for.