How movable collateral reforms are contributing to better access to credit

May 26th, 2023

Credit is often referred to as the lifeblood of a modern economy, crucial for the growth of enterprises, employment, and the economy. In credit transactions, lenders often have limited information about a borrower’s characteristics that would minimise the repayment risk. The pledging of collateral by the borrower to the lender is a widespread practice used to mitigate this risk.

The “Costs of collateral in Kenya: Opportunities for reform (2009)” study documented the collateral process in Kenya and the costs associated with the steps involved. The study identified constraints in the collateral process which altogether contributed more than 1% of the cost of credit secured by the collateral at the time. One of the constraints identified was the multiplicity of laws that impacted on the collateral process. From 2015 to 2017, the Government of Kenya with support from FSD Kenya and World Bank embarked on a reforms process to address some of the constraints identified.

This culminated with the enactment of the Movable Property Security Rights (MPSR) Act that unified various legal provisions that governed the use of movable collateral into a single piece of legislation. It also provided for the establishment of an electronic movable collateral registry, managed by The Business Registration Service, replacing the paper-based chattels registry. These reforms have yielded tangible benefits. As of June 2022, over 600,000 initial notices had been registered through the registry. The number and value of credit facilities granted using the registry has grown steadily over the years.1 A standout benefit has been the expansion in the types of movable assets that can be used as collateral, from livestock, crops in the field and intellectual property.

Typically, credit providers have had an overreliance on fixed collateral, usually land, thus limiting the credit provision to those who possess it. This has disproportionately impacted women who tend to own less land due to gendered social norms and formal rules. As such, addressing constraints that impede on the use of movable collateral will go a long way in expanding access to currently underserved segments, including women.

Alongside benefits have been challenges and aspirations for improvements. In 2022, FSD Kenya supported the Business Registration Service on a process to further strengthen the legal framework.

The objective was to identify the legal provisions that needed to be harmonised or enacted to enhance the effectiveness of the framework. The review further identified new legal provisions required to accommodate market developments that have occurred since the MPSR Act was enacted.

FSD Kenya also supported the Business Registration Service to conduct a technical review of the registry. The objective was to identify the technical upgrades required to improve the registry’s functionality and enhance the users’ experience. The review identified three priority areas for upgrading:

  • the reporting module to facilitate the generation of statistical and visual reports. This will include the capability to generate gender-disaggregated data and reports.
  • the expansion of the categories of user accounts to provide for individual, institutional and agent accounts
  • and integration with other systems outside BRS that hold records of movable assets that are used as collateral FSD Kenya is already supporting BRS to undertake these upgrades.

While Kenya has made great strides in developing its credit market, a lot more needs to be done. Addressing the constraints that impede the efficient functioning of the market is thus a policy priority. Much of FSD Kenya’s current and future work will be geared towards supporting these efforts.



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