PR&MB 2020 – Loans and Mortgages

The Bill makes provision for the status of contracts for loans and mortgages entered into prior to the declaration of a pandemic. The Bill stipulates that where a pandemic has a negative impact on the capacity of the public to meet its contractual obligations entered into prior to the declaration of a pandemic, the following measures shall apply during the pandemic up to three months after the end of the pandemic —

  1. A borrower and the respective lending financial institution shall enter into an arrangement to review repayment modalities;
  2. Penalties shall not be imposed on a defaulter; and
  3. A defaulter shall not be listed by a credit reference bureau.

The Bill provides that a lending financial institution shall not charge fees, interest or any other penalty for non-payment or late payment of obligations during the pandemic period. Therefore, interests will be accruing at the new “pandemic rate” agreed upon by both the lenders and borrowers but late payment or default interests or penalties shall be suspended.

The Bill having taken a purely suggestive approach presents the challenge that there is a huge possibility of the failure to agree on repayment modalities between lenders and borrowers. The Bill also seems to encourage individual debt restructuring of loans as opposed to a blanket reduction of interest rates sanctioned by law. The complexity presented by this approach is obvious as it is a cumbersome process. And it is purely suggestive hence isn’t likely to be enforced. This could lead to a myriad of legal issues after the pandemic. For instance, would failure to agree mean that the default interest rates applicable before the pandemic would be deemed to have automatically applied during the pandemic?

Further, as it stands, the Bill seems to primarily cushion borrowers and not lenders. The effect of this is that financial institutions would be unwilling to cooperate in this process as they stand to suffer loss. However, the Bill states that the Cabinet Secretary responsible for matters relating to finance may, with the approval of Parliament, provide measures to cushion both lenders and borrowers. Perhaps these measures would work best if initiated by Central Bank of Kenya.