The financial sector regulator recently published Draft Central Bank of Kenya (Credit Guarantee Business) Regulations, 2025, laying out who can operate in this space, how they will be overseen, and the safeguards required to protect the financial system.
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The draft regulations flow from the Business Laws (Amendment) Act, 2024, which expanded the CBK’s mandate to include the regulation of credit guarantee providers. The move is in line with the government’s policy drive to promote credit guarantee schemes as a tool to unlock lending to MSMEs, a longstanding pillar of Kenya Vision 2030.
They apply to entities engaged in providing guarantees to lenders, covering part of or all the credit risk on facilities advanced to borrowers in the event of default. They also clarify the definition a “credit guarantee provider”, which includes entities exempt from licensing under section 33X (2) of the CBK Act but still subject to registration with the CBK.
This category covers entities owned by foreign governments or international financial institutions that have entered into agreements with the Government of Kenya to enhance access to financial services or provide credit guarantee business to targeted groups, sectors, or regions for a specified period. It also includes foreign companies partnering with local financial institutions for similar purposes, as well as any other persons the CBK may designate.
The CBK wants guarantees that pay when needed, not only when convenient. To that end, the draft regulations require a minimum core capital of Sh1 billion, core capital of at least 10.5 percent of total risk-weighted assets (including off-balance sheet items, total capital of at least 14.5 percent of total risk weighted assets; and an irrevocable bank guarantee lodged with the CBK of Sh1 million or 10 percent of outstanding exposures at year-end, whichever is higher.
Credit guarantees may only be issued to lenders who satisfy specific prudential requirements set out by CBK thus minimising systemic risk.
The terms and conditions of such guarantees must be clearly disclosed and any variation to guarantee limits can only be done with the approval of the CBK. Furthermore, the classification and provisioning of credit guarantees must mirror the risk classification of the underlying loan exposures, with minimum provisioning thresholds established for each category of risk.
Directors and senior managers must meet fit and proper criteria, and firms must maintain risk management, governance and internal control frameworks.
A credit guarantee company may not amalgamate or transfer assets, liabilities or shares to another credit guarantee company without prior CBK approval. Any transfer of 10 percent or more of its shareholding also needs approval. If a firm tips into financial distress, the CBK can intervene in management to preserve stability.
For lenders’ credit committees, settlement mechanics are critical. The draft regulations set out specific conditions for calling a guarantee and prescribe timelines for validation and settlement.
Under the draft regulations, a guarantee may be called where:
(i) the amount in default under a credit facility has fallen due and remains unpaid;
(ii) the facility has been classified as non-performing in accordance with the CBK Prudential Guidelines; and
(iii) the guarantee was in force at the time the facility was so classified.
This alignment with loan risk classification is intended to reduce disputes and enhance predictability in recoveries. In our view, however, these conditions are unduly restrictive, as there are additional circumstances in practice where the invocation of a guarantee is warranted.
If adopted, the draft regulations would formalise Kenya’s credit guarantee market, providing clarity for lenders, protection for the financial system, and a pathway to scale for credit enhancement schemes targeting MSMEs.
The emphasis on capital strength, transparency and governance mirrors international practice and could help crowd in more lending where guarantees bridge risk gaps.
More importantly, formalisation of credit guarantee is expected to create a significant waterfall effect on trade and the general economy in Kenya. With lenders’ risks mitigated by regulated guarantors, we anticipate increased access to credit for MSMEs, fostering business growth and job creation. This, in turn, can stimulate supply chains and boost local trade.