No property to act as loan security? Don't worry

A majority of the memes currently making rounds on the internet in January are mainly centered on the financial frustrations.

A particularly popular one is one in which a man approaches his friend and asks for a soft loan to cushion him against the current hard times. Immediately on cue, comes in what I imagine is a Catholic Christian Choir singing, “It is impossible, it is impossible” on repeat in Kiswahili, illustrating the financial difficulties associated with January.

“Difficulties in borrowing and lending is the reason law makers came up with the Movable Property Security Rights Act, 2017 (the Act). The rationale behind the Act is the removal of the bureaucratic processes involved in the borrowing and subsequent registration of securities with lenders, improving the ease of doing business in the country,” says Albert Kahindo, an advocate of the High Court of Kenya practising at Centum Investments.

Mr Kahindo explains that the Movable Property Security Rights Act gives people who lack immovable property the ability to secure credit facilities by using movable assets as security. He says small and medium-sized enterprises that experience difficulty in accessing finance from the formal sector greatly benefit from the Act.

According to the Act , movable assets mean any tangible asset. This includes all types of goods, including non-conventional tangible ones such as crops, machineries, livestock, and household appliances or intangible assets.

Examples of intangible assets include receivables (money owed to a business and regarded as assets), choses in action an example being the accrued rights of a beneficiary to the estate of a deceased as well as deposit accounts. Electronic securities (securities not represented in a physical form) are also covered allowing investors to acquire, transfer and exercise their rights electronically, an example is share certificates recorded in an electronic register.

The Act also applies to assets such as a chattel mortgage, credit purchase transaction, credit sale agreement, floating and fixed charge, pledge, trust indenture and other intangible assets. Remarkably since we are in the age marked by creativity, innovation and technology intellectual property (IP) rights are covered as well.

Back to memes. Yet another popular meme is the one with a cat on one side depicting people’s humble demeanour when borrowing money with the words, “Please bro, times are tough, nikopeshe kakitu”. Conversely, arrogance and defiance is displayed on the cat’s face show-casing the classic scenario that ensues when the time comes to pay back. “Your small money is the reason you are shouting at me?” are used by the cat whose face now communicates insolence and arrogance.

“Generally speaking, when businesses and the economy is doing poorly, people’s borrowing power is significantly reduced. This isn’t because people don’t need the money, it’s simply because a majority cannot afford to throw caution to the wind and take the risk involved in borrowing from financial institutions” explains says Jonathan Makori, Assistant Branch Manager SBM Bank, Corner House branch, Nairobi.

The Movable Property Security Rights Act, 2017 attempts to cure this by introducing the use of movable property as security for loans which has a trickle-down effect of encouraging financiers to give securities based on movable property owing to the ease of protecting and securing such security rights.

So how do you go about borrowing money under the Act? The first crucial step is the creation of a security right. “A security right under the Act is created by a security agreement. Just as the standard contract, the security agreement must be in writing and signed by the grantor. Further, it must identify the grantor, the secured creditor and the collateral as well as describing the secured obligation except in the case of an agreement which allows for the outright transfer of a receivable. The agreement should also provide that the grantor (or the giver of the right) has rights in the asset to be encumbered or that they have the power to encumber it,” explains Mr Kahindo. Interestingly, the Act does not compel banking institutions and other lenders to accept movable assets as collateral, the ultimate decision is at the discretion of the parties involved. This is often after the institution assesses the risk involved in taking up such security.

Further, the Act creates the office of the Registrar as well as an electronic collateral registry where security rights in movable assets are registered on the Collateral online Registry through the e-citizen accounts. Notably, section 30 of the Act, provides 10 years as the maximum amount of time that you can hold a security interest over a movable asset.

The step that follows creation of a security right is registration. This is by way of notices lodged online on the Collateral Registry. The purpose of registration is to effect the acquired security right against any possible third parties. The initial notice lodged contains the information highlighted by Mr Kahindo —that is, the identifier and address of the grantor; the identifier and address of the secured creditor or its representative; a description of the collateral; the period of effectiveness of the registration as well as any other relevant information for statistical purposes only.

The specific documents you will be required to provide at the registration stage include a copy of your national identity card or passport, certificates of incorporation or registration, KRA PIN of the lender and debtor.

In addition you will be required to give the following further details, your postal and email address, phone numbers, description of whether debtors authority has been obtained or not, a copy of security instruments, right obtained through a court order or copy of the decree and an identifier of the secured collateral such as serial number or chassis number.

Mr Makori opines that stringent lending policies is another factor that contributes to difficulty in acquiring traditional loan facilities according to most Kenyans. In addition there is the risk of property seizure by lenders. The Movable Securities Act offers alternative ways of recovering debts apart from through strenuous, costly court process which makes it more attractive.

“For example, a chattel mortgage over your house can operate as security, allowing you to borrow money while using the title documents to your house as security. You do not part with possession of the house but just the title documents. A chattel mortgage is different from a traditional mortgage since the lender cannot take possession of the property that serves as security when in default. This is because there is no transfer of title only transfer of the documents of title,” says Mr Kahindo.

“In case of further default, with respect to an existing obligation or if the party at fault fails to comply within the stipulated period, the aggrieved party has the right to sue for any money due under the agreement. Additionally the secured creditor may take possession of the moveable asset and appoint a receiver of the income of the moveable asset or exercise the right of sale upon giving notice to the grantor whereas the grantor may exercise his/her right of redemption before the final disposition,” finished off Mr Kahindo.