CBK Moves to Supervise Loan Guarantee Firms

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The Central Bank of Kenya (CBK) has released draft regulations seeking to bring loan guarantee firms in Kenya under its direct supervision. The move comes as the sector grows rapidly, with many entities offering guarantees to lenders on behalf of borrowers, a function that has become an important part of credit access for small and medium-sized enterprises, individuals, and targeted sectors.

The proposed Central Bank of Kenya (Credit Guarantee Business) Regulations, 2025 introduce a comprehensive framework to regulate how such entities operate. Under the draft, any organisation that guarantees loans will now be treated as part of the formal credit system and must be registered, licensed, and monitored by the CBK.

The rules outline who can act as a credit guarantee provider, the specific activities allowed, and the circumstances under which a licence may be suspended or revoked.

Licensing and Operational Requirements

Under the new framework, offering loan guarantees will officially be recognised as a regulated financial service. Any provider seeking to operate must apply to the CBK with full documentation, including proof of incorporation, governance structures, a clear business strategy, details of capital sources, and policies covering anti-money laundering, data protection, and risk management.

The regulations strictly prohibit credit guarantee providers from engaging in deposit-taking, issuing loans directly, or trading commercially. They are also barred from taking large ownership stakes or engaging in activities that expose them to excessive market risk. Instead, their core role will be to backstop part or all of a borrower’s loan to reduce lender risk and enhance credit access.

Once licensed, providers will be required to maintain minimum capital and liquidity levels, establish strong internal controls, and ensure their risk management frameworks are effective. They must also maintain proper governance structures, with boards that include independent directors and committees for audit, risk, and guarantee oversight.

Prudential and Reporting Standards

To enhance transparency and accountability, the proposed regulation of loan guarantee firms in Kenya requires providers to classify and make provisions against guaranteed exposures based on the performance of the underlying loans. They must submit regular financial and risk reports to the CBK and maintain confidentiality of customer information, keeping proper records for at least seven years.

Firms will also be subject to independent audits and periodic assessments to ensure continued compliance. The CBK will have the authority to impose prudential requirements similar to those applied to banks and microfinance institutions, ensuring stability within the credit guarantee ecosystem.

Enforcement Powers and Penalties

The Central Bank will have clear enforcement powers under the new framework. It may suspend or revoke the registration of a credit guarantee provider if it is found to be undercapitalised, operating in a manner that is harmful to lenders or the public, or failing to meet legal obligations such as honouring valid guarantee claims.

If a firm violates anti-money laundering or data protection laws, or if its operations threaten financial stability, the CBK can take direct control. This includes imposing sanctions on directors and senior officers, restricting the issuance of new guarantees, or taking over management in extreme cases.

Governance and Ownership Rules

To prevent conflicts of interest and ensure accountability, the regulations cap individual shareholding and require all directors, senior officers, and major shareholders to undergo “fit and proper” vetting. The governance structure must promote sound decision-making, independent oversight, and compliance with prudential standards.

Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.