Wednesday, March 31, 2010

Kenya collateral costs stymie credit access: report

NAIROBI (Reuters) - Financial credit is out of the reach of most Kenyan firms in part because the process of providing securities for loans is excessively bureaucratic and expensive, a report said on Wednesday.

The study, "Cost of Collateral in Kenya - Opportunities for Reform", said the outdated processes invariably increased the costs of borrowing. It called for an overhaul of the "highly fragmented" legal frameworks, including a reform of stamp duty.

"Collateralisation therefore becomes a major deterrent to financial growth as the time and cost involved... means only a small fraction of potential borrowers are able to access finance," said the report.

The study, commissioned by Kenya's central bank and the Financial Sector Deepening trust, said it was imperative land, both urban and rural, becomes a viable source of collateral.

It also called for a unified, fully automated registry system to replace the existing numerous paper-based registries, to cut costs, time and opportunities for graft.

Only a quarter of firms in east Africa's largest economy said they have access to credit, while just 15.5 percent of companies actually use loans, the report showed, only marginally up on the average for sub-Saharan Africa.

"Lack of access to finance remains one of the factors limiting private sector growth," Finance Ministry Permanent Secretary Joseph Kinyua said at the report's launch.

Kinyua said the Treasury would re-assess stamp duty, identified by the report as costly, unfair and a major deterrent to accessing credit.

"Stamp duty is one of those issues we will be looking at in the context of the budget we are preparing. If it is a factor impeding the investment climate in a negative way then we will see what needs to be done," said Kinyua.

The central banks says commercial banks persistently cite the cost of collateral as contributing a significant portion of the premium factored into lending rates. But many Kenyans accuse the banks of greed.