Promissory Note (Kenya)

A Promissory Note in Kenya sets out the principal, interest and repayment schedule for a debt owed by the maker to the payee.

The Bills of Exchange Act (Cap. 27) is one of the oldest commercial statutes in Kenya — a reception of the English Bills of Exchange Act 1882 through the Judicature Act (Cap. 8) — and its provisions on promissory notes are well established in Kenyan commercial law. A Kenya Promissory Note, when duly executed, constitutes a negotiable instrument: the payee may endorse and transfer the note to a third party (a holder in due course) who takes the note free of most defences the maker might have against the original payee.

A Promissory Note in Kenya must satisfy the formal requirements of Section 83 of the Bills of Exchange Act: the promise must be unconditional; it must be in writing; it must be signed by the maker; it must state a sum certain in money (Kenya Shillings — KES); and it must be payable either on demand, at a fixed date, or at a determinable future time. A note payable 'when convenient' or 'if able' is not a valid promissory note because the promise is conditional.

Stamp duty under the Stamp Duty Act (Cap. 480) applies to promissory notes and bills of exchange. The Stamp Duty Act Schedule prescribes the applicable rate on promissory notes payable at a fixed time. Failure to stamp a note within 30 days of execution renders the note inadmissible in evidence in Kenya courts, though it does not affect the underlying debt obligation.

The Kenya Revenue Authority (KRA) administers stamp duty. For interest-bearing promissory notes, the interest element is taxable income in the hands of the payee and subject to withholding tax where applicable under the Income Tax Act (Cap. 470). The Central Bank of Kenya (CBK) regulates interest rates and lending through the Central Bank of Kenya Act (Cap. 491) and the Banking Act (Cap. 488). Non-bank lenders are not subject to CBK interest rate caps but must comply with the Consumer Protection Act No. 46 of 2012 where the borrower is a consumer.

A Promissory Note in Kenya should be clearly distinguished from a Loan Agreement — which is a more detailed bilateral contract governing the full terms of a lending arrangement — and from a Cheque, which is a bill of exchange drawn on a bank and payable on demand. A Promissory Note is a simpler, more summary instrument, commonly used for inter-company loans, loans between individuals, and short-term commercial credit arrangements in Nairobi and other Kenyan commercial centres.

A Kenya Promissory Note is used whenever money is lent informally or commercially and the parties need a simple, legally enforceable written acknowledgement of the debt and the repayment obligation.

A Promissory Note is required when one individual lends money to another — a family loan, a loan between business associates, or a personal advance — and the parties want a written record that is enforceable in the Small Claims Court (for amounts up to KES 1,000,000) or the High Court (Commercial Division) for larger amounts.

A Promissory Note is needed when a company registered with the Business Registration Service (BRS) provides a director's loan or an inter-company loan within a corporate group. A written promissory note documents the debt, prevents a later dispute about whether the advance was a loan or a capital contribution, and satisfies the Kenya Revenue Authority (KRA) that the arrangement is a genuine arm's length loan for tax purposes.

A Promissory Note is required in trade credit arrangements where a supplier extends credit to a buyer — for example, a Nairobi-based wholesale distributor supplying goods to a Mombasa retailer on deferred payment terms. The promissory note confirms the deferred payment obligation and, if the supplier needs liquidity, may be discounted at a commercial bank.

A Promissory Note is needed when a property buyer in Kenya needs to defer part of the purchase price under a private arrangement — for example, bridging a shortfall between the amount immediately available and the agreed purchase price while awaiting a mortgage from a commercial bank licensed under the Banking Act (Cap. 488) and regulated by the Central Bank of Kenya (CBK).

A Promissory Note is appropriate when the parties want a negotiable instrument that the payee can endorse to a third party, rather than a simple IOU or loan receipt that creates only a contractual right. Preparing the Promissory Note correctly — with the maker's full details, the exact sum, the payment date, and the stamp duty complied with — confirms its enforceability and negotiability under the Bills of Exchange Act Cap. 27.

Parties in Kenya should prepare a Promissory Note (Kenya) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under the Central Bank of Kenya Act (Cap. 491), the Central Bank of Kenya (CBK) regulates banking. The Capital Markets Authority (CMA) regulates securities under the Capital Markets Act (Cap. 485A). Section 84 of the Bills of Exchange Act (Cap. 27) governs promissory notes. The Kenya Revenue Authority (KRA) administers tax obligations. The Microfinance Act No. 19 of 2006 regulates microfinance institutions. The Hire Purchase Act (Cap. 507) governs credit sale agreements. Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A valid Kenya Promissory Note under the Bills of Exchange Act Cap. 27 must include the following essential elements.

Maker's Details: Full legal name, National Identity Card (NIC) number, and address of the maker (the party promising to pay). For a corporate maker, the Business Registration Service (BRS) registration number and registered office address must be stated. The maker's KRA PIN may also be included for completeness.

Payee's Details: Full legal name and address of the payee (the party to whom payment is promised). The note may alternatively be made payable 'to order' (enabling endorsement and transfer) or 'to bearer' (enabling any holder to demand payment).

Unconditional Promise: The note must contain an unambiguous, unconditional promise to pay — for example, 'I promise to pay' or 'We promise to pay'. Any conditional promise renders the note invalid as a negotiable instrument under Section 83 of the Bills of Exchange Act Cap. 27.

Principal Amount: The exact sum to be paid, expressed as a figure and in words, in Kenya Shillings (KES). The sum must be certain — 'KES 500,000 (Kenya Shillings Five Hundred Thousand)' — and must not be expressed as a formula or variable amount.

Interest Rate: Where interest is payable, the annual interest rate, the basis of calculation (simple or compound), and whether interest runs from the date of the note or from a specified default date. Interest rate must comply with applicable law and should be commercially reasonable to avoid challenge under the Consumer Protection Act No. 46 of 2012 for consumer lending.

Payment Date: The date or event on which the note is payable. This may be 'on demand' (payable immediately upon written demand by the payee) or a fixed future date in DD/MM/YYYY format, or a determinable future date (e.g. '90 days after the date of this Note').

Place of Payment: The city or town in Kenya where payment is to be made — typically the payee's bank in Nairobi, Mombasa, or the relevant commercial centre.

Signature and Date: The maker's original signature (or company seal and authorised signatory for a corporate maker) and the date of execution. A witness signature, while not required for validity, is recommended for evidential purposes.

Stamp Duty Compliance: The note must be stamped within 30 days of execution under the Stamp Duty Act (Cap. 480). Failure to stamp renders the note inadmissible in evidence before Kenyan courts.

Governing Law: Kenya law shall govern the note, with disputes subject to the jurisdiction of the High Court of Kenya (Commercial Division) or the Small Claims Court for claims not exceeding KES 1,000,000. Forms-legal.com recommends that both maker and payee retain a signed original of the Promissory Note.

Additional compliance elements for a Promissory Note (Kenya) used in Kenya include: Under the Central Bank of Kenya Act (Cap. 491), the Central Bank of Kenya (CBK) regulates banking. The Capital Markets Authority (CMA) regulates securities under the Capital Markets Act (Cap. 485A). Section 84 of the Bills of Exchange Act (Cap. 27) governs promissory notes. The Kenya Revenue Authority (KRA) administers tax obligations. The Microfinance Act No. 19 of 2006 regulates microfinance institutions. The Hire Purchase Act (Cap. 507) governs credit sale agreements. Forms-legal.com provides this template as a starting point for Kenya-compliant documentation.