It's time we adopt other collateral mechanisms

Financial credit is a critical driver of both enterprise growth and household wellness in an economy.

Studies have shown a consistent nexus between access to credit and gross domestic product (GDP) growth.

This correlation illustrates that when enterprises and individuals access more credit, they are predisposed to more job creation, investment, and optimal participation in economic activities.

It is, then, not surprising that access to credit is one of the metrics that can be used to assess the soundness of a given financial system.

Other key financial indicators, as highlighted by the FinAcess Household Survey, include usage, quality, and impact.

Underpinning the effectiveness of these measurements is the key role financial literacy plays in supporting financial inclusion.

The key facilitators of access to the credit include financial literacy, awareness about sources of credit and availability of collateral.

Financial literacy empowers an individual, enhancing their ability to repay a loan facility. It also enhances awareness about potential sources of formal credit.

The indicators of financial literacy in a business setting include well-maintained records and having an enterprise formally registered. 

Innovations

With the widespread adoption of technology in the financial services sector, it is increasingly becoming apparent that innovations will continue to play a vital role in reducing the cost of credit through lenders’ operational efficiency.

For many credit seekers, collateral becomes a major barrier to accessing formal enterprise or personal finance.

Lenders use collateral as a risk mitigation mechanism; a fallback recourse in the event of loan default.

While extending credit, a lender’s intention is to provide credit support, with recovering the loan through the collateral attached to it is an option of last recourse. 

Ordinarily, collateral requirements are based on the amount of credit being sought and the risk involved.

If the credit proposal is not bankable, access to credit will be denied even if the collateral attached was adequate.

Where the credit proposal is found bankable, one can have collateral and still be unable to access credit if it is insufficient or does not meet a bank’s collateral requirements.

For this reason, it is important to be aware of other collateral options that can be accepted by a bank, beyond the traditional security types. 

Although the collateral moveable property security registry has been operational since 2017, its utilisation has been low.

This owes to low levels of public awareness of how the frameworks work.

Enhancing financial literacy will, therefore, spur further uptake, which will in turn enhance levels of access to credit. 

On the policy side, there is a need for further institutional and regulatory initiatives.

Under intellectual property collateral, for instance, it is difficult to value intellectual properties due to the limited availability of accredited valuers.

Developing a comprehensive valuation framework will not only increase the uptake of intellectual property as collateral but also support entrepreneurs in the ICT and creative sectors.

There is no doubt that with facilitative institutional, policy and regulatory measures, enhanced use of the moveable property will support growth in the economy. 

Dr Habil Olaka is the chief executive officer of the Kenya Bankers Association