What is an Escrow Account, and How is it Used in Kenya?

When individuals or businesses engage in high-stakes transactions—where significant money, property, or contractual obligations are involved—concerns around trust, timing, and delivery often arise.

Picture this: You’re ready to buy your dream home in Nairobi, invest in a thriving business in Mombasa, or purchase a high-value asset like a car or expensive equipment.

The excitement is real—but so is the worry. Can you trust the seller to deliver after you’ve paid? What if the deal falls apart, leaving your hard-earned cash at risk?

That’s exactly why escrow accounts exist. They provide a neutral, secure space to hold money or documents until all sides of a deal meet their obligations.

What is an Escrow Account?

An escrow account is a third-party account where funds are temporarily held during the course of a transaction. It's a financial arrangement where a neutral third party holds funds on behalf of two transacting parties until certain agreed-upon conditions are met. 

An escrow account is used to safeguard money during a transaction to ensure fairness for both sides.

The buyer deposits the money into the account, and the funds are only released to the seller when both parties fulfill their contractual obligations.

Read Also: How to Safely Buy Land in Kenya 

Purpose of Escrow Account 

The primary goal of an escrow account is to protect the interests of both the buyer and seller. For buyers, it prevents the premature release of money in case the seller fails to meet their side of the bargain. For sellers, it confirms that the buyer has the necessary funds and is serious about the transaction.

Escrow creates a structured process that promotes transparency. It reduces the likelihood of fraud, buyer’s remorse, or seller non-performance by removing the need for either party to trust the other blindly. Instead, both place their trust in a regulated intermediary.

Key Parties Involved

There are usually three key players in any escrow arrangement:

• Buyer: The individual or entity placing funds into escrow to initiate the transaction.
  
  
• Seller: The party expected to deliver a product, service, or asset before receiving the funds.
  
  
• Escrow Agent: A neutral third party, often a licensed financial institution or lawyer, tasked with holding the funds and releasing them based on the agreed terms.
  
  

In some cases, other parties like legal advisors, regulators, or agents may be involved, depending on the transaction type and value.

Read Also: 7 Signs That You Are Financially Secure Without Realising It Yourself 

How Does an Escrow Account Work?

Setting up and using an escrow account in Kenya follows a defined series of steps, whether you’re buying land, a business, or goods. Here’s how the process typically unfolds:

1. Agreement on Terms

Both parties agree on the details of the transaction: what’s being exchanged, how much will be paid, and under what conditions the payment should be released. These terms are documented in a binding contract.

This contract often includes:

• Description of the asset or service
• Payment amount
• Timelines
• Inspection periods, if applicable
• Conditions for release or refund of funds
• Dispute resolution procedures
  

2. Selection of an Escrow Agent

The buyer and seller mutually agree on a trusted escrow provider. This can be a bank, law firm, or specialized escrow service provider. 

A formal agreement is signed between the escrow agent and both parties, outlining roles, obligations, and fee structures.

3. Buyer Deposits Funds

The buyer transfers the agreed funds into the escrow account. The escrow agent confirms receipt and notifies the seller that the funds are secure and ready to be released once conditions are fulfilled.

The funds are held in a segregated account and are not accessible by either party until final approval.

4. Seller Fulfills Their Obligation

Once notified, the seller proceeds to fulfill their part of the deal. This could mean transferring a land title, delivering an item, or providing a service. If the deal includes inspections or verification steps, these occur at this stage.

5. Buyer Confirms Satisfaction

The buyer inspects the goods, property, or documents delivered. If satisfied, they instruct the escrow agent to release the funds to the seller. If the buyer is not satisfied, and the issue aligns with pre-defined dispute terms, the matter may move to mediation or arbitration.

6. Escrow Agent Releases Funds

After confirming that all conditions have been met—or that a valid resolution has been reached—the escrow agent releases the funds to the seller. The transaction is closed, and all parties receive confirmation.

7. Refund If Deal Falls Through

If the transaction fails due to unmet conditions, and both parties agree (or as decided through the agreed dispute resolution mechanism), the escrow agent refunds the money to the buyer, less any applicable fees.

Where Can Escrow Accounts Be Used in Kenya?

Escrow arrangements are applicable across various industries in Kenya. Their usefulness is most apparent in high-value or high-risk transactions. Common use cases include:

Real Estate Transactions

Buying land or property in Kenya often involves significant sums and lengthy documentation. Escrow accounts are used to hold the buyer’s money while the seller arranges for title transfers, searches, or clearance of rates and taxes. It protects the buyer from fraud, especially where fake land documents or multiple sales of the same property are common.

Vehicle Sales

For high-value vehicle transactions between private individuals, escrow ensures that the buyer doesn’t pay until logbook transfers or mechanical inspections are complete. It’s useful in cases where repossessed vehicles or imports are involved.

Business Acquisitions

When purchasing shares in a company, buying out a partner, or acquiring a business outright, an escrow structure allows the buyer to verify the financial health of the entity and complete due diligence before funds change hands. It also protects sellers who have met their contractual obligations but are waiting for payments.

Equipment Leasing and Asset Finance

When leasing or buying expensive equipment, especially for construction or agriculture, escrow can be used to hold payment while waiting for delivery, inspection, or verification of warranties.

Legal Settlements

Escrow accounts can be used to manage settlement amounts in legal disputes, where a party agrees to pay a certain amount contingent on fulfillment of certain terms or court rulings.

Tendering and Procurement

In public and private sector procurement, escrow can be used to secure funds for suppliers who are hesitant to commit to production or delivery before receiving partial payment assurances.

Online Marketplaces and Freelance Contracts

Some platforms, like Upwork and Alibaba offer escrow-based payment systems to protect both buyers and service providers in online transactions. These arrangements reduce non-payment risks for freelancers/remote workers or people shopping online.

Read Also: How I saved Ksh1 Million Before My 26th Birthday 

Benefits and Challenges of Using Escrow in Kenya

Escrow accounts are beneficial, but they also come with specific challenges.

Benefits

• Fraud Reduction: Escrow holds funds securely until both parties meet their obligations, lowering the risk of default or deceit.

• Legal Compliance: Escrow agents help ensure transactions meet legal requirements, reducing exposure to regulatory errors.

• Enhanced Security: Funds are held in separate, protected accounts, shielding them from misuse or unauthorized access.

• Transparent Recordkeeping: Each step is documented, creating a clear audit trail useful for resolving disputes or verifying compliance.

• Trust in High-Stakes Deals: Escrow builds confidence between unfamiliar parties, making it easier to close large or sensitive transactions.

• Dispute Resolution Structure: A clearly documented process for managing delays, dissatisfaction, or failure reduces the chance of a legal standoff.

• Flexibility for Complex Terms: Escrow supports phased payments and conditional releases, ideal for deals tied to inspections, approvals, or milestones.
  

Challenges

• Fees and Costs: Escrow services are not free. Providers charge either a flat fee or a percentage of the transaction, which can increase your costs.
  
  
• Delays: Escrow may extend the timeline of a transaction, especially if verification processes are lengthy or if disputes arise.
  
  
• Few Licensed Providers: The number of institutions offering legitimate escrow services is limited. This scarcity creates room for unregulated or poorly structured alternatives that expose users to risk.
• Limited Flexibility to Amend Terms: Once escrow instructions are signed, making changes mid-transaction (e.g., adjusting delivery timelines or amounts) is often difficult, requiring formal amendments or new agreements.

• Penalties for Withdrawal: Backing out of an escrow transaction before completion can attract steep cancellation fees.

Who Offers Escrow Services in Kenya?

A handful of institutions in Kenya provide escrow services, either as part of broader banking solutions or through specialized arrangements.

Commercial Banks

Several large commercial banks in Kenya offer escrow services. These institutions provide escrow arrangements for real estate deals, mergers and acquisitions, international trade, and project finance. Their offerings often cater to corporate clients, high-net-worth individuals, and law firms.

Law Firms

Some legal practices offer escrow services as part of conveyancing or commercial law support. This is common in property sales where the lawyer acts as both the legal advisor and escrow agent. The advantage is their expertise in compliance, documentation, and dispute resolution.

However, not all lawyers are licensed to hold client funds in escrow, so it’s important to confirm if the law firm has the necessary trust account authorization and licensing.

Real Estate Agencies

A few property platforms partner with banks or lawyers to offer escrow-linked payment processes, especially in off-plan or high-value transactions. These are more common in Nairobi and Mombasa, where modern real estate projects use structured financial models.

Specialized Escrow Companies

Some fintech and payment platforms are beginning to offer escrow-like services for online transactions. These may not be officially registered as escrow agents but offer similar functionality for peer-to-peer or freelance payments.

Read Also: I Copied Someone's Business Idea and Lost Ksh400,000. Here's What I Learned

Wrapping Up

Escrow accounts offer a structured and secure way to complete transactions involving large sums or complex terms. 

As awareness grows, so does the potential for safer, more transparent business practices across the country. However, due diligence is essential when dealing with any escrow account providers. Confirm their licensing, track record, and dispute-handling mechanisms.