Trade Finance Agreement (Kenya)

A Trade Finance Agreement in Kenya sets out the rights, duties and consideration binding the parties to it.

The Banking Act Cap. 488 and the Central Bank of Kenya Act Cap. 491, administered by the Central Bank of Kenya (CBK), govern commercial banks and other licensed financial institutions providing trade finance facilities in Kenya. The CBK's Prudential Guidelines (specifically the Guideline on Credit Risk Management CBK/PG/04) require banks to maintain documented credit agreements for all trade finance facilities, including single transaction letters of credit and revolving trade credit lines. The Law of Contract Act Cap. 23 provides the underlying contractual framework, while the Foreign Exchange (Forex) Act and the CBK Foreign Exchange Guidelines govern the currency and cross-border payment aspects of international trade finance.

Letters of credit (LCs) issued by Kenyan banks for import transactions are subject to the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce (ICC), which Kenyan banks adopt as the governing standard for LC operations. The LC creates a payment obligation of the issuing bank — independent of the underlying sale contract — once the beneficiary (exporter) presents conforming documents at the nominated bank. The Banking Act Cap. 488 requires Kenyan banks issuing LCs to maintain adequate capital and liquidity buffers against contingent LC liabilities.

Invoice financing and factoring arrangements in Kenya are governed by the Law of Contract Act Cap. 23 and, where the assignment of receivables is involved, by the Movable Property Security Rights Act No. 13 of 2017. The Movable Property Security Rights Act established a Collateral Registry at the Attorney General's office where security interests in receivables, inventory, and other movable assets can be registered, giving trade finance providers priority over competing creditors.

The Kenya Revenue Authority (KRA), through the Customs Services Department, administers import duties under the East African Community Customs Management Act 2004 and the Value Added Tax Act No. 35 of 2013. Trade finance agreements must account for import duty and VAT obligations, as these form part of the total financing requirement for import transactions. The East African Community (EAC) Common External Tariff (CET) sets the applicable duty rates for goods entering Kenya from outside the EAC customs union. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 15 of the Employment Act 2007 (No. 11 of 2007) govern the core requirements for this type of document.

A Trade Finance Agreement in Kenya is required whenever a business needs structured credit support to finance the purchase, production, or shipment of goods in a domestic or international trade transaction, going beyond what an ordinary bank overdraft or loan agreement provides.

A Trade Finance Agreement is needed when a Kenyan importer requires a letter of credit (LC) to purchase goods from a foreign supplier who will only release the goods against a bank guarantee of payment. The Agreement governs the bank's LC facility, the importer's reimbursement obligation, the security provided to the bank, and the charges payable for the LC issuance and any amendments.

The Agreement is required when a Kenyan exporter of agricultural produce — coffee, tea, horticulture, or cut flowers — requires pre-export financing from a bank or trade finance company to fund the cost of growing, harvesting, processing, and shipping goods before payment is received from the foreign buyer. Pre-export finance is critical in Kenya's agricultural export sector, which contributes over KES 200 billion annually to foreign exchange earnings.

A Trade Finance Agreement is needed when a manufacturing company in Kenya's Special Economic Zones (SEZs) or Export Processing Zones (EPZs), established under the Special Economic Zones Act No. 16 of 2015, requires supply chain finance to pay suppliers promptly while receiving extended payment terms from buyers. Supply chain finance programmes — where a bank finances the supplier's receivable at a discount — require a structured agreement among the buyer, supplier, and financing bank.

The Agreement is required when a Kenyan trader imports goods through the Port of Mombasa or Jomo Kenyatta International Airport (JKIA) under a documentary collection arrangement (documents against payment or documents against acceptance) rather than an LC, and requires a short-term financing bridge between the arrival of goods and their on-sale to domestic buyers.

A Trade Finance Agreement is also needed when a bank extends a revolving trade credit line to a regular importer or exporter, allowing multiple transactions to be financed under a single master agreement with sublimits for individual LCs, import bills, and pre-export drawings, rather than requiring a new credit agreement for each trade transaction.

A Kenya Trade Finance Agreement under the Law of Contract Act Cap. 23 and the Banking Act Cap. 488 must contain the following essential provisions to be commercially effective and CBK-compliant.

Parties and Authorisation: Full legal names and addresses of the financing institution (bank or trade finance provider) and the borrower (importer, exporter, or trading company); the borrower's BRS Registration Number, KRA PIN, and Tax Compliance Certificate reference; and — for corporate borrowers — a certified copy of the board resolution authorising execution of the Agreement and drawdown of the facility, as required by the Companies Act No. 17 of 2015.

Facility Type and Amount: A precise description of the trade finance facility — letter of credit facility, import bills financing, pre-export finance, invoice discounting, or revolving trade credit line; the maximum facility amount in Kenya Shillings (KES) or agreed foreign currency (USD, EUR, GBP); and the applicable sublimits for different instruments if the facility is a multi-product line.

Purpose and Eligible Transactions: A statement of the permitted use of the facility — financing the purchase of specified categories of goods, financing shipments to or from specified countries, or financing transactions with specified counterparties — and the eligibility criteria that each transaction must meet before the financing institution will provide funding support.

Drawdown Conditions and Procedure: The conditions that must be satisfied before each drawdown — clean due diligence, satisfactory pro-forma invoice or purchase order, valid KRA import declaration (IDF), and CBK foreign exchange approval where required; the drawdown request format and minimum notice period; and the financing institution's right to refuse a drawdown that does not meet eligibility criteria.

Pricing: The applicable interest rate or discount rate on financed amounts, stated as a margin over a reference rate (such as the CBK Central Bank Rate or SOFR for USD facilities); the commitment fee on undrawn facility amounts; LC issuance fees; amendment fees; and any other charges the financing institution may levy under the CBK's fee disclosure requirements in the Banking Act Cap. 488.

Security and Collateral: The security package supporting the facility — a charge or lien over imported goods while in transit or in a bonded warehouse (pledge or hypothecation of goods); assignment of export proceeds from foreign buyers; a charge over the borrower's trade receivables registered under the Movable Property Security Rights Act No. 13 of 2017 at the Collateral Registry; or a corporate or personal guarantee. The Agreement must address the borrower's obligation to maintain insurance over goods constituting collateral under the Insurance Act Cap. 487.

Documentary Requirements: The shipping and commercial documents the borrower must present for each transaction — commercial invoice, bill of lading or airway bill, packing list, certificate of origin, phytosanitary certificate (for agricultural goods), and any Kenya Bureau of Standards (KEBS) certificates required under the Standards Act Cap. 496 for controlled products.

Events of Default and Acceleration: Trigger events including failure to reimburse the bank on the due date, insolvency under the Insolvency Act No. 18 of 2015, material adverse change in the borrower's financial position, breach of financial covenants, or the occurrence of a cross-default under any other facility. Upon default, the bank may accelerate all outstanding amounts, enforce security, and apply the proceeds of any assigned receivables or pledged goods to the outstanding balance.

Foreign Exchange and Regulatory Compliance: The borrower's obligation to obtain all CBK foreign exchange approvals required under the Foreign Exchange Act; to comply with the East African Community Customs Management Act 2004 import procedures; and to pay all applicable KRA import duties and VAT before or upon clearance of goods through KPA Mombasa or JKIA. Forms-legal.com provides this Kenya Trade Finance Agreement as a starting framework for businesses engaging with trade credit facilities regulated by the Central Bank of Kenya. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 15 of the Employment Act 2007 (No. 11 of 2007) govern the core requirements for this type of document.