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.
Credit: Business Daily