Ideas & Debate

Why 11th Parliament was most disruptive for Kenyan banks

parliament

The National Assembly in session. FILE PHOTO | NMG

Last week, MPs marked the end of the 11th Parliament. This Parliament will be remembered as the most legislatively disruptive for the banking sector—after the passing of two landmark laws.

The first was the interest rate control vide the Banking (Amendment) Bill, 2015 passed on Wednesday, July 27th 2016.

It was signed into law by the President on August 24th, 2016. As you may be aware, this was the third (and only successful) attempt to establish a cap and floor on lending and deposit rates respectively in Kenya.

There had been two previous attempts: first was the famous Joe Donde Bill, which never saw the light of day.

The second, and most visible attempt, was through miscellaneous amendment insertions in Finance Bill 2012, which failed to garner enough support in Parliament.

The operationalisation of the Banking (Amendment) Act, 2016 has since triggered in-depth diagnostics of business strategies by commercial banks.

I can report that none of them is laying any concrete groundwork for adjusting to the new operating environment apart from the ongoing staff layoffs spree (which is rather reactionary).

The new reality is that the era of predatory, double-digit margin banking is gone. Any incoming administration looking to ease the environment will only be talking amendments, but not total repeal.

The second legislative disruption was the passage of the Movable Property Security Rights Bill, 2017, which was signed by the President on Wednesday, May 10, 2017.

This Act legalises an electronic registry (e-registry) for movable assets. This e-registry, once fully operationalised, will make it possible for commercial banks to register security interests in movable assets, both tangible and intangible.

The scope of tangible assets covered in the Bill encompasses livestock, crops, vehicles and machinery while intangible assets broadly includes receivables arising out of documented contracts as well as royalties from intellectual properties.

It effectively disrupts the traditional approach to lending against immovable assets especially land. It has always been ripe for disruption anyway.

I mean traditionally, financial institutions prefer to lend on the back of an immovable asset (especially as land). Indeed land forms the bulk of consumer loan collaterisation in the country.

Implementation

The rationale underlying this traditional approach is that immovable assets are more secure than movable assets.

For instance, authentic land title deeds registered with the lands registry can be presented as proof of ownership—which creates less room for ownership dispute.

It is impossible for the borrower to run away with an immovable asset, which enhances the ‘collateralisability’ of such assets.

Kenya has now joined Zambia and Zimbabwe in availing legal frameworks for the establishment of movable assets e-registries.

However, Zimbabwe’s proposed legal framework, known as the Movable Property Security Interest Bill), is yet to receive Presidential assent.

A Presidential assent, however, is expected sometime in late Q3 2017 or early Q4 2017.

I note that its implementation, however, will still be subject to a number of sequencing risks. The requisite infrastructure will need to be in place. A registrar will have to be appointed by Treasury Cabinet Secretary.

The registry will have to issue a set of guidelines on collateral admissibility criteria. I mean it could be months before the e-registry is up and running.

The second issue will be acceptability among commercial banks. I don’t think it will be automatic. All the teething issues aside, it remains a spot-on legislation.