Borrowers could find it easier to move secured loans as CBK and KBA develop collateral registry
The Central Bank of Kenya (CBK) and the Kenya Bankers Association (KBA) are developing an electronic collateral registry intended to make it easier for borrowers to move secured loans between banks, as the regulator seeks to strengthen competition and reduce the cost of credit.
CBK Governor Kamau Thugge told the National Assembly’s Finance and Planning Committee this week, that the proposed system would allow borrowers to transfer collateral from one lender to another with fewer administrative and legal costs.
He said the electronic registry would make the process almost costless by reducing the need for borrowers to engage multiple lawyers and complete lengthy procedures when moving their security to a competing bank.
The initiative forms part of CBK’s broader efforts to encourage competition between lenders, particularly under the risk-based credit pricing framework, which requires banks to assess the risk associated with individual borrowers when determining loan prices.
CBK and KBA work on electronic collateral registry
Thugge said the Central Bank was working with the Kenya Bankers Association to develop an electronic system that would make collateral transfers between lenders easier.
He described the registry as a way of reducing the administrative burden borrowers face when they want to move secured loans to another bank.
Under the proposed arrangement, a borrower who finds more favourable lending terms at a competing institution would have an easier route to transferring the collateral attached to the existing facility.
The Governor said the process would become much simpler because borrowers would not need to rely on several lawyers to facilitate the movement of their security between financial institutions.
“If you have that electronic collateral registry, it becomes very easy for you to be able to move your collateral from one bank to another bank,” Thugge told lawmakers.
He added that the process would be “almost costless”, reducing expenses that can discourage borrowers from switching lenders.
New system aims to reduce costs when borrowers switch banks
The proposed registry addresses a practical obstacle in secured lending. Borrowers may find that another bank is offering more attractive interest rates or better loan terms, but moving an existing facility can involve legal work, documentation and administrative procedures associated with the pledged collateral.
Those costs can make switching unattractive, even when another lender offers a lower borrowing rate.
By making collateral transfers easier, CBK and KBA want to reduce the financial and administrative burden associated with moving between banks.
This could give borrowers greater flexibility when comparing lending offers, particularly where a loan is secured against property or other assets.
The proposal also supports refinancing competition because banks would have to consider the possibility that existing customers could move their secured facilities to institutions offering more favourable terms.
Collateral portability could strengthen competition between lenders
Thugge linked the electronic registry to CBK’s broader approach to improving competition in the banking sector.
He said the system would complement the risk-based credit pricing framework by giving borrowers more flexibility when they believe a bank has assessed their risk incorrectly.
Under risk-based pricing, lenders consider factors associated with a borrower’s credit profile when setting the interest rate charged on a facility. Borrowers with different risk profiles can therefore receive different lending rates.
The Governor argued that transparency and the ability to move between banks would help make this framework more competitive.
He said a borrower who believes their bank has assigned an incorrect risk assessment should be able to approach another lender without incurring significant switching costs.
That ability could encourage banks to compete more actively for customers by offering better pricing and loan terms.
CBK links easier switching to risk-based credit pricing
Thugge said the electronic collateral registry would work alongside transparency measures and the risk-based credit pricing model to improve the way lending rates are determined.
The Governor argued that competition between banks was essential for achieving sustainable reductions in lending rates.
He said borrowers should be able to compare how different lenders assess their risk and move to another institution if they believe they are being charged more than their credit profile warrants.
The proposed registry is therefore part of a wider effort to make it easier for borrowers to exercise choice in the banking sector, while encouraging lenders to compete on the cost and terms of credit.
CBK’s position is that reducing the costs associated with moving collateral between banks could strengthen that competition and make the banking market more responsive to borrowers seeking better financing terms.
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