Cash-strapped Kenyans increasingly used household goods, livestock and office equipment to borrow Sh43.56 billion from commercial banks in the year to August when small businesses were starved of credit.
Central Bank of Kenya (CBK) data shows that nearly a third of the new loans of Sh150.56 billion issued by commercial banks used household goods, live animals and office equipment as collateral.
This is thanks to the Movable Property Security Rights Act 2017 that has enabled banks to diversify collateral from the tradition of using immovable assets — primarily land and buildings — which are beyond the reach of most Kenyans.
The Sh43.5 billion was more than double the Sh19.6 billion worth of loans extended using movable securities in the year to August last year, underlining the bankers comfort in accepting household goods as security.
This trend emerged during a period when the legal caps on interest rates had pushed banks to turn their backs on millions of low-income customers and small businesses who were deemed as too risky to lend to.
Bankers link the jump to the creation of an electronic registry under the movable property law, which allows lenders to track properties used for loans as well as allow banks to lay claim on the assets.
“The moveable assets register sort of brought into the pool additional possibilities for collateral beyond what was initially there (land and buildings as well as motor vehicles’ logbooks),” Kenya Bankers Association (KBA) chief executive Habil Olaka said on phone.
“That could have boosted the ability of those borrowers who initially could not access loans because they don’t have land and buildings to now be able to access credit and use those assets as collateral.” Borrowers can use movable assets they already own or banks can finance the purchase of the property for their listing at the registry
The law and regulations created a single electronic registry for movable assets used as security for bank loans, which makes it easier for borrowers who do not own land or buildings to also access loans on strength of the movable properties.
Initially, ownership of collateral in the form of movable assets could easily be transferred without a bank’s knowledge, leaving it exposed in case of a default.
Banks have traditionally not accepted movable assets as collateral for loans because of lack of a central database they could log into and make a claim on an asset attached to a loan.
Household items, motor vehicles, furniture, office equipment, livestock, crops, stocks, intellectual property such as signed contracts by artistes, and inventory are some of the moveable assets that have been embraced by banks as collateral for loans, says a CBK-backed study.
The statistics show that consumer durables like vehicles, washing machines and fridges is the only credit segment that has posted a steady double-digit growth in nine months through August, with expansion in loans rising from 11.0 percent in December 2018 to 23 percent.
Growth in loans for movable assets was nearly four times higher than the average private sector credit flow of 6.3 percent year-on-year in August, the fastest pace post rate cap law.
Household loans, which are mainly based on pay slips, grew at the second fastest pace of 8.6 percent (Sh34.31 billion) followed by trade (8.4 percent or Sh35.19 billion), manufacturing (7.5 percent or Sh24.71 billion) and finance and insurance (6.3 percent or Sh5.63 billion).
These sectors appear to be the safe bets for the risk-averse banks, which have since September 2016 been rationing credit based on risk of default, with the government being the biggest beneficiary.
The rise in use of household goods and office equipment as security comes in a period when corporate Kenya has witnessed reduced profitability that has ushered in job cuts, freezes in hiring and near stagnant wages in the race to protect profit margins.
This has resulted in cash flow problems for homes and small businesses, which reflect the fact that Kenyans with more than Sh100, 000 as savings in their bank accounts last year dropped for the first time in more than 13 years.
Borrowers are required to register their collateral at the eCitizen online platform, under the business registration service.
Banks then use the collateral registry to determine the risk profile and subsequent facility for which a client qualifies.
The lenders advance loans of lower than the value of the asset, allowing them to recoup their cash on repossession of the property in event of a default. The borrower, therefore, pays part of the cost of acquiring the asset.
“By virtue of the fact that it (an asset) is now in the register, you (the lenders) are able to trace that asset… and take that asset back because it’s an identified item that is used as collateral. So, in the event of default, you fall back on that collateral just like the way the land and building have been,” Dr Olaka said.