Kenyan Banks Caught in Legal Crossfire as EACC Targets Illegally Acquired Properties

Kenyan banks are facing a significant challenge as the Ethics and Anti-Corruption Commission (EACC) ramps up efforts to reclaim public properties that were illegally acquired and later used as collateral for loans. This situation is placing financial institutions at risk of losing millions of shillings, highlighting critical gaps in the property lending ecosystem.

The Root of the Problem

At the center of the issue is the legal principle that any property title obtained through illegal means remains invalid, even if the current owner was unaware of the original wrongdoing. Banks that accepted these properties as collateral now face the possibility of losing their security in foreclosure cases.

In one prominent case, a prime piece of land in Mombasa, originally designated for government staff housing, was unlawfully allocated to an individual who used it to secure a loan. The Environment and Land Court recently ruled that the land must revert to public ownership, potentially leaving the lender exposed to a loss exceeding KSh 30 million.

The Legal Precedent

Courts in Kenya have consistently invalidated titles tied to illegal acquisitions, regardless of whether they have since been transferred to new owners. For banks, this means that even seemingly valid collateral could be rendered worthless if the title’s origins are legally questionable. This poses a significant risk, particularly as the EACC continues its aggressive crackdown on corruption-linked land deals.

Is It Sustainable to Investigate Every Title?

While thorough due diligence is crucial, it raises a critical question: Is it feasible—or even sustainable—for banks to dig into the history of every property title they accept as collateral? The Kenyan land registry is riddled with systemic inefficiencies, incomplete records, and cases of corruption. Investigating the root of each title could:

• Increase Transaction Costs: Verifying titles down to their origins could be a lengthy and expensive process, potentially slowing down lending operations and making loans less accessible.
• Overburden Professionals: Legal, valuation, and surveying professionals already operate under significant pressure. Adding deeper historical investigations could strain resources and delay transactions.
• Risk Missing Hidden Issues: Even with the best intentions, some irregularities may escape detection due to gaps in the land registry or falsified records.

This raises the need for a balanced approach that considers both the risks of invalid titles and the practical limitations of the due diligence process.

The Role of Professionals in Security Perfection

Professionals such as lawyers, valuers, and land surveyors play a crucial role in mitigating risks during the security perfection process. Their expertise is important for verifying the authenticity of property titles, conducting due diligence, and ensuring compliance with regulatory requirements.

1. Lawyers: Conduct title searches at the land registry to uncover irregularities, verify ownership history, and check for encumbrances prior to registration or mortgage charge.
2. Valuers: Provide independent market valuations and confirm that property details align with zoning and ownership records. Valuers are also expected to ensure the interest in the property and physical boundaries match registered details to avoid discrepancies caused by falsified deeds and surveys.
3. Banking Professionals: Integrate professional findings into lending decisions, ensuring that only properties with clear, legitimate titles are accepted as collateral.

The Implications for Lenders

The ongoing reclamation of public land underscores the importance of robust security perfection processes. Banks must collaborate more closely with legal, valuation, and surveying professionals to detect red flags before accepting any property as collateral. They must also strike a balance between thorough title verification and operational efficiency to avoid crippling their lending processes.

A Call for Systemic Reform

The financial sector’s predicament highlights deeper systemic issues in Kenya’s land administration. Comprehensive reforms are needed to enhance transparency, digitize records, and prevent illegal acquisitions. Collaborative efforts between banks, professionals, and government agencies will be critical to restoring confidence in property transactions.

However, this raises a broader question: Can Kenya’s property market sustain a framework where every title’s root must be investigated? Does it mean the title search can no longer be trusted at face value?