President Uhuru Kenyatta has signed into law a Bill allowing borrowers to use household goods, crops, live animals and even intellectual property to secure commercial loans in a move aimed at boosting access to credit.
The Movable Property Security Rights Act 2017 paves the way for the formation of a centralized electronic registry for mobile assets that financial institutions can use to verify the security offered. The new law is meant to help bank customers without common and costly forms of collateral such as motor vehicles (logbook) or land (title deed) to access credit. “The Act promotes consistency and certainty in securing financing relating to movable assets,” the President said in a brief announcing the Bill’s signing into law.
The new law will be used to establish an Office of Registrar and the appointment of a registrar to “receive, store and make accessible to the public information on registered notices with respect to security rights.” These rights, which also include deposit accounts and electronic securities, will be listed in the registry using a unique identification number that allows tracking of those that have been used to secure bank loans or collateral.
Banks have traditionally not accepted movable assets as loan collaterals because of lack of a central database they could log into and make a claim on an asset attached to a loan. This meant that ownership of such collateral could easily be transferred between persons without the bank’s knowledge, leaving lenders exposed in the event of default.
A 2014 report by Financial Sector Deepening (FSD) Kenya said countries such as Mexico and Ghana have reported an increase in SME lending following the setting up of similar registries. Implementation of the law is likely to be demanding as the government has to make regulations prescribing a host of issues such as the minimum value of assets to be listed and how their existence shall be ascertained.
“It’s a good development for the industry. The absence of this law has meant that banks could not advance credit to people presenting mobile assets as collateral,” Habil Olaka, the Kenya Bankers Association chief executive said, adding that the setting of the legal framework paves the way for implementation. “The regulations should clearly specify which kinds of assets, including biological assets, qualify.”
The new law also allows borrowers to use a single asset to access credit from different lenders. Borrowers who currently use motor vehicles as security, for instance, have to transfer ownership of the car to the bank and deposit the logbook with the lender as evidence of ownership.