Using movable assets as collateral in Kenya

Many growing businesses in Kenya hold more of their value in machinery, vehicles, stock and unpaid invoices than in land or buildings. Lenders have traditionally preferred land and buildings as security. The Movable Property Security Rights Act, 2017 gives businesses a clear way to offer movable assets instead, and gives lenders a public registry in which to record their security.

The law does not make every asset bankable. A lender still needs to identify the asset, put a value on it and be able to enforce against it if the facility goes wrong. This brief explains what that takes.

What the law allows

The Act covers a wide range of tangible and intangible movable assets. For most SMEs, the useful ones are these:

• Equipment and machinery used in the business, from production lines to construction plant.
• Vehicles, including commercial vehicles and trailers.
• Stock: raw materials, work in progress and finished goods.
• Receivables: the money customers owe you under invoices and contracts.

A security right can cover a specific asset, such as one excavator, or a whole category, such as all present and future stock or receivables. The Act also covers the outright transfer of receivables, which is relevant to invoice discounting and factoring.

What registration does

A lender records its security by registering a notice at the Collateral Registry, an online, notice-based register hosted by the Business Registration Service and accessed through eCitizen. Registration makes the security right effective against third parties and helps establish its priority over competing claims. That is why lenders search the registry before they lend and register promptly once the security agreement is signed.

Two points are often missed. First, the registry records security rights only. It is not a register of ownership, so a clean search does not prove that you own an asset. Second, a notice stays on the register until it is cancelled. When a facility is repaid, ask the lender to cancel its notice. An old notice left in place can hold up your next facility. The same search works in reverse: before you buy second-hand equipment or vehicles, search the registry to see whether a lender already claims them.

What lenders look for

A lender looks at three things in any movable asset: whether it can be clearly identified, whether its value will hold over the life of the facility, and whether it could be recovered and sold if needed.

The answers differ by asset. A standard vehicle or widely traded machine with a serial number and clear ownership records scores well. Specialised equipment built into a factory floor scores less well, because it is harder to remove and resell. Stock depends on how quickly it moves, whether it is perishable and how reliably you count it. Receivables depend mostly on who owes them: invoices to established buyers with a record of paying carry more weight than overdue or disputed balances.

Expect the lender to keep a margin between the value of the assets and what it will advance, and to set conditions such as regular stock or debtor reports.

Records to keep

• A fixed asset register with descriptions, serial or chassis numbers, purchase dates and locations.
• Purchase invoices, import documents and logbooks that prove ownership.
• Details of any existing finance, lease or hire-purchase arrangements over the assets.
• Monthly stock reports that reconcile to your accounts.
• An aged debtors listing, with the contracts and delivery evidence behind major invoices.
• Maintenance records for key equipment and vehicles.

Consistency matters as much as completeness. If the asset register, the accounts and the valuation describe the same machine differently, the lender will ask why, and the file will stall until you answer.

Valuation and insurance

For larger assets, lenders usually ask for a valuation by an independent valuer they accept. Agree the valuer and the basis of value with the lender before you commission the report, so that it only has to be done once. Ask how often the lender expects a fresh valuation, and build that into the facility timetable.

Insurance follows the security. Lenders normally require the assets to be insured against loss and damage, with the lender's interest noted on the policy, and they check that cover stays in force. Stock cover should reflect the stock levels you report, and vehicle cover should list the vehicles in the security. Cover is placed through licensed insurers and brokers. What the lender needs to see is evidence that it matches the assets.

How we help

Epiidosis Africa helps growing SMEs prepare movable assets for a lender's review. We review your asset register, ownership records and stock and debtor reporting, prepare the facility file and introduce you to independent licensed banks and financiers. Our insurance and risk consulting practice reviews whether your existing cover matches the assets you plan to offer, and our research practice can support market evidence for specialised equipment or stock.

We do not lend or hold security, and we can't promise approval. The decision rests with the bank or financier.