A Small Claims Court has dealt a major blow to costly digital lending after refusing to uphold interest and penalty charges that would have more than doubled a borrower's debt.
In a ruling that questions the fairness of extreme loan pricing, the court found that the lender's charges were excessive and ordered that only the amount originally borrowed be recovered, together with limited court-approved interest.
"The court finds the claimed interest and penalties to be disproportionate and inequitable. The court declines to enforce them," the judgment said.
The dispute arose after Zenka Digital Limited advanced Benson Njeru a Sh76,000 loan in September 2024, with the money expected to be repaid within one month. Under the agreement, the total amount payable at the end of the loan period stood at Sh103,360.
After the borrower failed to clear the loan within the agreed period, the lender moved to court seeking Sh152,000, relying on the interest and default charges contained in the loan agreement.
However, the court found that Zenka was only entitled to recover the Sh76,000 principal and declined to enforce the contractual interest and penalties that had pushed the claim to Sh152,000.
In the July 10, 2026 judgment, the court noted that the agreed monthly interest of 36 percent translated to 438 percent annually.
“The rationale is to guard against excessive accumulation of interest and charges and to prevent a lender from recovering amounts that are grossly disproportionate to the principal debt,” the court said.
The court also pointed out that the lender had imposed a default charge of 1.5 percent every day, equivalent to about 45 percent each month.
Digital lending has become one of the fastest ways for Kenyans to access unsecured loans through mobile phones, making disagreements over interest rates and debt recovery increasingly common.
After reviewing the evidence, the court was satisfied that the lender had proved the money was sent to the borrower's M-Pesa account through the records presented, including the loan application and payment details.
Even so, the magistrate ruled that the interest terms created an unreasonable financial burden that the court could not uphold.
The court observed that combining the monthly interest with the daily default penalty would cause the outstanding debt to rise rapidly.
"Such rates can produce a debt that bears no reasonable relationship to the amount borrowed and would result in an oppressive burden on the borrower," the court said.
The magistrate added that enforcing those provisions would "offend the principles of fairness, equity and good conscience that guide the court in the enforcement of contractual obligations".
Although parties are generally expected to honour agreements they enter into freely, the court said it still has the authority to reject contract terms that lead to unfair or unconscionable results.
The court entered judgment for the principal amount of Sh76,000, awarded interest at 18 percent annually for two months from September 23, 2024, and granted court-rate interest from the date the suit was filed until the amount is fully paid. Zenka was also awarded Sh10,000.
During the hearing, Benson Njeru argued that the amount claimed by the lender was inflated because the interest charged exceeded what is allowed by law. He further maintained that he had made repayments that were not reflected in the lender's records.
The court dismissed that argument after finding that no evidence had been produced to prove the alleged payments.
"I note that though the respondent claimed he made some payments, the same was not supported by evidence," the magistrate said.