Digital and non-bank lenders have suffered a major setback after the Small Claims Court ruled that they cannot recover excessive interest and unexplained charges from borrowers, in a judgment that could reshape debt recovery practices across Kenya’s digital credit sector.
The court held that debt recovery must not become a tool of oppression through the unchecked accumulation of interest and fees. “While courts exist to enforce obligations willingly entered into by parties, they equally bear the duty of ensuring that debt recovery does not become an instrument of oppression through the unchecked accumulation of interest and charges,” the ruling stated.
The dispute arose after a lender sought to recover more than Sh677,000 from a borrower who had taken an initial loan of Sh400,000 and had already repaid nearly Sh300,000. The court found the lender had failed to adequately explain how it arrived at the claimed amount, and described its effective interest rate of about 86.4 per cent as “nothing short of exploitative.”
The judge rejected claims for monitoring and insurance fees for lack of justification and instead ordered the borrower to pay only the outstanding balance of Sh100,631, with interest accruing at the court rate rather than the lender’s contractual rate.
The ruling lands as the Competition Authority of Kenya (CAK) raises fresh alarm over regulatory gaps exposing borrowers to hidden fees, predatory lending and coercive debt recovery in the fast-growing digital credit market. The authority said it handled 180 complaints against digital lenders and microfinance institutions in the financial year ended June 2023, rising to 190 the following year, with investigations into more than 60 cases uncovering recurring exploitative practices.
“Consumers often face misleading and false claims by business operators… the true cost of loans or the penalties for default are hidden at the time of onboarding, hoodwinking the consumer to make uninformed decisions,” CAK said.
The authority cited a case in which a borrower who sought a Sh300,000 logbook loan received only Sh200,000 after undisclosed deductions, with the balance ballooning to Sh500,000 within five months before the lender moved to auction the vehicle.
According to the Digital Financial Services Association of Kenya, about eight million Kenyans borrowed Sh180 billion from digital credit providers in 2024, underscoring the scale of exposure. CAK has called for stronger coordination among regulators, stricter enforcement of ethical lending standards and wider consumer education, even as Embakasi East MP Babu Owino pushes a bill proposing strict interest caps on digital lenders.
