Commercial banks and saccos can now blacklist guarantors with credit reference bureaus (CRBs) if principal borrowers default on loans, the High Court said.
The decision is expected to adversely affect the activities of lenders who require guarantors to disburse credit.
The judgment was made in a case where a guarantor had sued Co-operative Bank for listing him with a CRB after a school he guaranteed defaulted.
Mr Obadhia Gitonga Micheu had accused Co-op Bank of maliciously listing him with the CRB and occasioning him huge losses after banks rejected his application to borrow on the basis of his negative credit record.
Justice Grace Nzioka found that although the bank was negligent in failing to inform Mr Micheu of the outstanding loan amount, it acted within its legal mandate to list the guarantor with the CRB.
"The referral of any information to the CRB is a requirement of the law and the defendant as a financial institution is entitled to do the same, and as a result of their negligence in notifying the plaintiff of the outstanding balance, the court has held that the plaintiff will not pay any interest on the said sum," she ruled.
Justice Nzioka said she could not find in the given circumstance, that the defendants were malicious. They, instead, were more negligent in handling the matter.
"In the given circumstances, I find no basis for granting the orders sought," said the judge, referring to Mr Micheu's prayer that the bank be ordered to delist him.
The court held that the relationship between Mr Micheu as a guarantor is founded in the law of guarantees, and that a guarantor assumes the responsibility of paying debt where the principal debtor fails.
The judge noted that the fact that the bank failed to inform the guarantor of the outstanding amount does not release him from the contract and that he should have settled when he learnt of the same.
At the heart of the dispute are loans advanced to Chogoria Junior School where Mr Micheu is a director and guaranteed the loans using two parcels of land, one belonging to him and another owned by his father, Jediel Micheu.
In September 2008, Mr Micheu was served with notice that the school had defaulted on the loan with an outstanding balance of Sh952,262.
Subsequently, Co-op Bank allowed him to dispose of the land to settle the debt but subject to the transaction being handled by the bank's appointed lawyer.
The land was sold and the debt settled, but it later emerged that some Sh133,000 was still outstanding in a separate loan account.
The bank further said the settled loan had also left unsettled interest that accrued as it processed the land for sale.
Mr Micheu, however, denied knowledge of the outstanding arrears, arguing that he only learnt of the matter in 2012 after a bank rejected his loan application saying that he had been listed with CRB.
He had asked court to award him Sh215.8 million being damages and lost earnings that accrued after his loan application was rejected denying him a chance to upgrade his business.
Co-op Bank insisted that it had informed Mr Micheu of the outstanding loan but admitted that the initial notification erroneously left out the outstanding loan in the separate account.
The court found that there was no evidence that the borrower was informed of the outstanding loan of Sh133,000 and the accrued interest.