Rotich moves to create single collateral register for banks

The Treasury has published a Bill creating a single electronic registry for motor vehicle logbooks and other movable assets used as security for bank loans – aiming to make it easier for borrowers to maximise the use of such collateral.

A centralised registry is the government’s answer to the difficulties facing borrowers seeking to realise full value of assets that remain in the hands of one bank they borrowed from in the past.

Borrowers, who currently use motor vehicles as security, for instance, have to transfer ownership of the car to the bank and deposit the logbook, which is evidence of ownership, with the lender.

The cost of transferring car ownership at the Kenya Revenue Authority (KRA) registry is estimated at Sh5,000 and is borne by the borrower further raising the cost of credit.

To borrow from another bank, a person who has used his car as collateral for a previous loan has to find a means of settling the debt and getting the security back in his name before he can approach another lender for money using the same car as security in the event that the value of the asset allows.

A borrower who has, for instance, used a car valued Sh2 million to secure a loan with bank A and remains with a Sh200,000 balance cannot use the same logbook as collateral for a new loan with another lender that is offering cheaper rates till they clear with bank A.

The new Bill hopes to solve that problem by effectively enabling borrowers to use a single security to borrow from two banks if its value can cover both.

“The objects of this Act is to promote consistency and certainty in secured financing relating to movable assets and to enhance the ability of individuals and entities to access credit using such assets,” Treasury secretary Henry Rotich said.

A centralised register also makes it easy for a borrower to transfer loans across the industry, which is currently impeded by the tedious and costly process of revaluing the asset.

Similar registries in other jurisdictions have had significant impact on access to credit for SMEs and have won the support of international financial institutions such as the Financial Sector Deepening (FSD).

In Ghana, 86 per cent of registrations are securing loans granted to microbusinesses and SMEs.

“A single registry available for use to everybody significantly simplifies the legal and registration framework, resulting in straightforward priority rules, enhanced transparency and reduced cost of credit,” says FSD Kenya, a proponent of the registry.

Currently, the use of assets as collateral is pegged on different laws such as The Chattels Act and The Hire Purchase Act.

“A multiplicity of registries, which are manual and do not share information, prolongs the collateral process and increases the costs,” a committee formed by the government to investigate the high price of loans said, adding that a properly functioning automated registry should be established.

The Bill provides that in case of default, the registry will also be used to show the lender with the first claim on the asset being disposed. The initiative, however, appears not to have the full backing of the lenders where credit officers remain sceptical of its application.

Some of the lenders have raised queries on how an asset used to secure two loans would be treated in cases where a customer has defaulted on one loan, but is diligently servicing the other.

Cars are the most common asset used to secure short- term loans in Kenya, making the logbook an important asset.
Banks take full value of brand new cars as security for a loan and up to 80 per cent for used cars.

In some countries such as Mexico, the registry is also used by car buyers to confirm the true identity of vehicle owners before completing a transaction.

The Bill also incorporates use of receivables as security. SMEs have for long complained that their debtors, most of whom are reputable institutions, including government, are ignored when they are being appraised for loans.

Under the proposed law, the receivables will be included as part of a borrower’s movable assets and recorded in the centralised register.

Kenya’s top three retailers — Nakumatt, Tuskys and Naivas — owed manufacturers Sh8 billion in unpaid dues as at September last year, making receivables a massive item in their list of assets.

Besides, the national government owed contractors and suppliers Sh111 billion at the end of the last fiscal year in June 2015, while county governments held Sh37.46 billion in unpaid contracts.

Mr Rotich has, however, left out trading securities such as shares and Treasury bills and bonds, meaning they will not be in the centralised register.

Land titles, which are the most widely used form of security in Kenya, have also been left out of the centralised register pending automation of land registry.

An electronic land register is expected to open up the mortgage market, whose growth has over the years remained painstakingly low. There are 25,000 mortgage loans against a population of 21 million deposit accounts.

Mr Rotich has also made it easier for banks to take over collateral in the event of default by eliminating the need for a judicial process.

“A secured creditor is entitled to obtain possession of the collateral in case the grantor has consented in the security agreement to the secured creditor obtaining possession, in which case no court application is required,” the Bill says.

Banks have previously complained that courts tend to favour borrowers by issuing injunctions stopping repossession of assets. This means bad borrowers continue enjoying use of pledged assets while not servicing loans.

But the law also moves to prevent banks from irrational possession and sale of collateral by demanding that any such disposal of assets will have to consider the interests of other parties with a stake in the same property.

Lenders have been cited for disposing of assets at throw away prices just to cover for small debts outstanding to them -- leaving borrowers worse off. Some of the lenders have been accused of using repossession to grow personal wealth.

Commercial lenders are currently facing a spike in non-performing loans, which now stand at 8.2 per cent of total credit disbursed. The defaults are expected to result in increased repossession of pledged assets.