Treasury secretary Henry Rotich said the new depository for collateral will be modelled on the Central Depository and Settlement Corporation (CDSC) that is used to secure and transfer shares in public listed companies.
“When you want to move (a loan or mortgage) to another bank you have to go to the Ministry of Lands to remove the charge and move it to the next bank. We want to get a central depository system for these titles so that borrowers don’t have to remove the charge only to perfect it again with the other bank,” said Mr Rotich.
“We are polishing the law to facilitate this new system and our target is to introduce it in the next Finance Bill.”
Centralising the loans securities custody away from individual banks will spare borrowers the agony of charging a security afresh for a loan or mortgage whenever they seek to move a loan to a new lender.
The decision should also help resolve a long-standing complaint that the difficulties consumers face in transferring securities have reduced competition for borrowers among banks.
Lenders ordinarily charge a property a fresh when processing a loan for which the property is the collateral, irrespective of whether another bank had executed the same charge — with the borrower bearing the related transaction costs.
Mr Rotich said the centralisation of the securities register should offer borrowers a chance to shop for cheaper loans, and to easily migrate to another bank when they find a better deal.
Difficulties with the transfer of collateral have been seen to work in favour of banks because the ultimate impact is to lock in customers from moving to competitors once a loan is agreed.
Banks ordinarily factor in the cost of managing collateral when pricing the loans, meaning that a central depository could also lead to lower interest rates in the long run.
Some of the costs incurred when taking up mortgage include stamp duty, charged at 4.2 per cent, transaction, valuation and legal fees, which can add up to 10 per cent of the total loan amount and must be paid upfront.
This means that transferring a mortgage or securitised loan of Sh10 million could see the borrower incur for a second time incidental costs of up to Sh1 million. It also means that there would be no incentive to seek a transfer to a cheaper option because the opportunity cost of the move would be lost.
“What you have at the moment, especially at the Lands registry, is a cumbersome process whose cost is ultimately borne by the customer,” said Kenya Bankers Association chief executive officer Habil Olaka.
A similar model at the CDSC, which has been in place for listed shares since 2004, has made it easy for investors to change their stockbroker in search of better services, besides lowering the risk of customers losing their securities in the event of an intermediary’s collapse.