When a borrower approaches a bank with the intention of acquiring a loan, they are asked for collateral. Middle income earners and High Net Worth Individuals (HNWIs) are likely to brandish their tittle deeds and their bank accounts are quickly credited. But what becomes of the low income earner who badly needs the loan to expand his/her enterprise when a bank slams the door at the mention of credit by the have not?
A research conducted by the Kenya Bankers Association (KBA) in 2012 dubbed Collateral Lending: Are there Alternatives for the Kenyan Banking Industry? showed that Kenyan lenders are wary of high risk of default by a low income borrower and as such insist on collateral as the main approach to credit mitigation leaving the interested party high and dry.
Seven years later, the country is still grappling with the same problem, this time with the added baggage of the law capping interest rates which has made it extremely difficult for Micro, Small and Medium Enterprises (MSMEs) to expand their operations.
Despite being the major credit mitigation method, collateral lending has serious shortcomings, it hampers competition and limits lending activity especially if the banking sector demonstrates over-reliance on it
The choice of a borrower is also inhibited by the fact that there are no concrete legislations on transfer of collateral between lenders in Kenya.
This leaves the borrower with no room to move to a more attractive option if collateral is already attached by one lender, even in an environment of changing interest rates.
As a result, it is not possible for the borrower to switch to a financial services lender with more competitive rates making loans unresponsive to changing interest rates.
The sticky issue in the credit debate is that while collateral lending is deemed to be safest, it is not the only method of credit mitigation, which exposes reluctance by the banks to advance credit to small businesses.
If the banks wanted to help the small enterprises, they would allow the low income earners to guarantee their loans through other credit mitigation measures including: credit referencing (individual or organisation that can provide borrowers past record with credit) and credit transfer risk (where default risk is transferred from one individual to another) but while these options can be used, they are not.
During the launch of the new generation coins at the Central Bank of Kenya (CBK) on December 11, 2018 President Uhuru Kenyatta waded into the lack of credit to small businesses debate expressing his concern at how much the government is losing as banks opt to invest in government bonds at the expense of lending to SMEs.
“I ask you, as the owners of credit it is time that you start changing how you look at how you deal with credit. We have a lot of young and innovative people,” said President Kenyatta, he added, “They may not have tittles but they have great ideas. We can take on jointly the responsibility of training them on how to manage their accounts and how to manage their finances but at the end of the day that is of no use if they cannot access credit,”.