The Cabinet has approved a Bill that would allow borrowers to use household goods like fridges and cookers to secure commercial bank loans in a move that widens the bracket of those able to access debt from commercial lenders.
The executive approved the creation of a centralised electronic registry for movable assets, which is the government’s answer to the difficulties facing potential borrowers who do not have land — the preferred collateral of lenders — to back up their credit applications.
“The Bill will provide for the creation of an electronic registry, enhance confidence of the lending institutions and create an enabling environment to lend against moveable assets as collateral,” read a brief from the Cabinet.
Goods listed in the electronic registry will have a unique identification number that will allow tracking of those that have been used to secure bank loans or collateral.
Movable assets, such as household goods and office equipment have been ignored by lenders as loan collaterals owing to lack of a central registry where they could log in their claim on the asset.
This means ownership of a collateral could easily be transferred without the bank’s knowledge, leaving it exposed in case of a default.
Should the Bill become law, it will also allow borrowers to use a single asset to get credit from different lenders.
A new lender will know whether there is headroom for additional lending. 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.
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.
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 until cleared by bank A.
A centralised register makes it easy for a borrower to transfer loans across the industry.