Harsh land laws force banks to rethink lending

A stalled law reform touching on land that bankers and financial institutions were pushing has forced a change of strategy that could see a shift in evaluating and securing loans.

The bankers’ umbrella body, Kenya Bankers Association, said last year that it had proposed amendments to the legislation owing to what it termed as legal limitations arising from the Land Act, Land Registration Act, and the National Land Commission Act enacted in 2010.

But the umbrella body’s boss, Mr Habil Olaka, says there has been little progress in attempts to have the contentious sections of the laws amended.

“The proposed amendments are still with the technical committee, which is analysing all the technicalities that the legislation presents to the industry,” he said.

The amendments were rendered urgent following a ruling by the High Court last year that barred Equity Bank from auctioning property to recover money from a loan defaulter.

COLLATERISED ASSET

The law, which came into force in May 2012, requires banks selling a defaulter’s property to do so at the highest possible market value and, upon receiving the proceeds, deduct whatever the borrower owes and remit the rest to the property owner.

Previously, there had been no legal requirement on lenders to recover any amounts from the sale of a collateralised asset above the outstanding loan amounts, leaving helpless borrowers at the risk of losing their entire investment even after servicing part of the loan.

In the case of Equity Bank, for instance, the court stopped the public sale of a defaulter’s property, saying the bank had failed to comply with Section 97(2) of the Land Act.

The section makes it mandatory for the lender to give a defaulter at least 90 additional days to redeem the outstanding amount after the expiry of a sale notice, an action that sent shock waves in the industry and prompted KBA to act.

KBA says the complexities are indeed a challenge to lenders, considering that most banks rely on collateral to give loans.

Bankers feel that certain sections of the land laws grant their customers the power to recover assets auctioned by a financial institution due to a default.

“It is our view that such agreements should be governed by the contract signed between the two parties and not be defined by legislation,” said KBA in an earlier interview.

The bankers want an amendment to Section 79 (3) of the Land Act that provides that the consent of the spouse be obtained when auctioning matrimonial property.

MATRIMONY PROPERTY

KBA feels that the law itself is vague on what matrimonial property is and how such property is to be treated if the parties are married but live separately, just as it is not clear for cases of civil or polygamous marriages since there is no marriage registry in the country.

The Land Act also requires that banks to involve tenants and other guarantors before selling the property that was used as collateral for a loan, a requirement that may make banks shy away from title deeds as collateral.

Experts say that indeed banks have to act as the new land legislation drastically limits their powers.

“This will indeed be a nightmare to banks but it puts to an end cases where husbands clandestinely sold matrimonial property using fake wives without the knowledge of their real spouses,” said Mr Harold Ayodo, an advocate of the High Court.

He said a polygamous man is required to obtain consent from all his wives before using a title deed as collateral since any transactions done without the consent of all spouses are illegal and have no basis under the Act.

Facing a headwind, the bankers want to accelerate the shift to character-based lending, which puts more weight on borrower’s history than securities.

The Association of Kenya Credit Providers (AKCP) is in the final stages of launching phase two of the credit information sharing regime that now brings on board deposit-taking microfinance (DTM) institutions in sharing information across all lending institutions.

“Phase II, which involves both positive and negative information, also known as  full file data, will be rolled out in this first quarter,” said Mr Jared Getenga, interim chief executive officer of AKCP.

KBA had already indicated that it would be banking on the credit information sharing initiative, which introduces character-based lending as an alternative for credit providers to shift from security-based lending upon enactment of the necessary regulations.

Under the Credit Reference Bureau Regulations 2013, banks will be able to share comprehensive data on a customer’s credit history and CBK-licensed credit reference bureaus (CRB) can develop risk assessment products for banks to better price loans.

The Credit Reference Bureau Regulations 2013 were thus gazetted on January 17 last year, mandating banks to share both positive and negative data on their loans, enabling good borrowers access to cheaper loans.

In phase one, banks only shared negative information about borrowers, helping them avoid lending to serial defaulters.

“As lenders get accustomed to applying credit scores in risk management, the focus on tangible collateral, e.g. land and buildings, will diminish in the medium term,” said Mr Getenga.

Mr Getenga, however, said that currently, the thrust is on banks and DTMs because the new regulations do not cover other lenders like saccos, which are expected to be brought on board in phase three.

AGENCY MODEL

The CRB regulations have made it easy for borrowers to access credit reference bureau services by making a provision for them to introduce the agency model.

Currently, the only two licensed CRBs, Metropol CRB and Transunion CRB, operate in Nairobi and are expected to serve the whole nation.

“It also provides for enhanced consumer protection mechanisms such as issuance of pre-listing notices to borrowers before they are listed in the case of a default,” explained Mr Getenga.