Capitulo V: Propuesta del Modelo de Análisis de la Gestión Institucional
5.6. Resultado de la capacidad institucional de la Universidad
In section 4.2, it was shown that businesses can raise their financing needs from a
variety of possible sources: banks, microfinance institutions, investment companies as well as
listing on the national public equity market. Far from being able to access the right type of
enterprise capital at the right prices, however, it has been illustrated in the preceding section
that various structural features can either promote or degrade the ease with which needy
businesses can access finance. The following sections draw out the key barriers.
4.5.1 Collateral Quality
Collateral requirements vary for different types of financial products. A feature
common to all requirements, however, is the difficulty faced by the SME sector in
consolidating good collateral. This is partly owing to the widespread reality of business
informality, and secondly, historical difficulties in accessing finance. Collateral frequently
equates to assets, and the type of asset that banks can accept as security against lending is
narrow – usually an all-asset debenture.89
Factors like corruption operate to complicate collateral laws even more. For instance,
property titles would ordinarily be good collateral, but corruption at the Lands Registry has
given rise to a situation whereby false title deeds have been issued. It is a frequent occurrence
in Kenya to have several title deeds issued to different people over the same piece of property.
Establishing good title is problematic, and banks are wary of lending against certain property
deeds. This was compounded by a long practice by the government of allocating public land
irregularly.90
Several other factors combine to render the creation, perfection and enforcement of
security interests inefficient in Kenya, especially where such interests relate to or are
otherwise associated with land. The first is the multiplicity of statutory instruments on the
creation and perfection of security interests. There are over 20 legislations that govern the
creation of security interests, and they do not prescribe a consistently coherent regime.91Each
piece of legislation lays down a different registration procedure, but there is no law that
prioritises interests so created.
On land-related security interests, more than five statutes govern land rights, creating
at least three different distinct legal frameworks for land rights – under the Government
89FSD Kenya, ‘Costs of Collateral in Kenya: Opportunities for Reform’ (September, 2009) 8 <www.fsdkenya.org/pdf.../09-11-24_Costs_of_Collateral_Study.pdf> accessed 21 December 2011
90A recent classic illustration is the Syokimau Demolitions saga: where scores of Kenyans were left homeless following a decision by government agencies to flatten their homes citing impropriety in land titles. To access video footage, follow: <http://www.youtube.com/watch?v=0X8MczAumYU&feature=related>; for a trail on newspaper reportage, see for instance, Mutinda Mwanzia and Judy Ogutu, ‘Court Stops Demolitions’ (East African Standard, Nairobi, 16 Nov 2011),
<http://www.standardmedia.co.ke/InsidePage.php?id=2000046838&cid=4&> accessed 16 Nov 2011.
91These legislations include: Transfer of Property Act, Group 8; Law of Contract Act Cap 23; Registered Land Act Cap 300; Registration of Titles Act Cap 281; Government Lands Act Cap 280; Land Titles Act, Cap 282; Sectional Properties Act No.21 of 1987; Companies Act Cap 486; Limitation of Actions Act Cap 22; Stamp Duty Act Cap 480; Evidence Act Cap 80; Land Control Act Cap 302; Registration of Documents Act Cap 285; Banking Act Cap 488; Traffic Act Cap 403; Chattels Transfer Act Cap 28; Advocates Act Cap 16; Agriculture Act Cap318; Arbitration Act No.4 of 1995; Notaries Public Act Cap 17 of 1958.
Lands Act of 1915, the Registered Land Act of 1963, the Registration of Titles Act of 1920,
the Land Control Act of 1967 and the Sectional Properties Act of 1987. The recently adopted
National Land Policy has as one of its core aims the consolidation and rationalisation of laws
relating to land.92 In addition, the legal framework on land creates two estates in land –
freeholds and leaseholds.93To make matters worse, the Land Control Act of 1967 voids any
transaction in land unless the Land Control Board consents thereto. These boards are
administrative, dispersed across the country in every district, sit once a month in most cases,
but generally apply no predictable system in their decision-making processes, rendering the
process of granting consent non-predictable.94
Section 96 of the Companies Act of 1962 lists a limited range of registrable interests
that include fixed and floating charges. In Kenyan practice, floating charges are not preferred
by funders for three reasons: first, they are defeated by priority creditors; secondly, they are
subject to a hardening period during which they can be challenged in a liquidation process;
and thirdly, the holder’s rights are limited to payments made into a specific account.
Dishonest borrowers could easily default through asset management schemes.
To further complicate the foregoing scenario, there is no single registry for the
lodgement of security instruments – meaning that the multiplicity of registries renders the
discovery of priority securities difficult. Besides the different registries, the laws prescribe
different time periods within which securities must be registered. For instance, under the
Chattels Transfer Act of 1930, it is 21 days;95under the Companies Act of 1962, it is 42
92Republic of Kenya, Ministry of Lands, Sessional Paper 3/2009 on National Land Policy (Government Printer, 2009) < http://www.ardhi.go.ke> accessed 5 July 2010
93ibid 18,19
94For more detailed reviews, see Jose E Mantilla, Peter M Mwangi and Jennifer W Kibaara, ‘Costs of Collateral in Kenya: Opportunities for Reform’ (Financial Services Deepening Kenya, September 2009)
<http://www.fsdkenya.org/pdf_documents/09-11-24_Costs_of_Collatral_Study.pdf> accessed 19 October 2011.
days;96and under the other laws providing for security interests, it is on average 30 days.
Computerisation of government functions has just recently started, meaning that in the past
and even now, most security interest registries operated manual databases, and remain
isolated. Validating titles and interests is an odious and imprecise process. The effect of the
preceding difficulties is that even in cases where capital-seeking enterprises show collateral,
the ‘bankability’ of the collateral is not assured.
To address these issues, law reform offers an important part solution. The law reform
agenda stands out clearly in each of the preceding paragraphs, and include, in summary, the
need to deal with corruption, the creation of stronger regulatory frameworks around
registration of interests in land, the consolidation and clarification of the legal regime on
security interests that includes systems for the establishment of a national registry of
securities, with all supporting institutions.97
4.5.2 Cost of Bank Credit
It has been shown under section 4.3.3 that accessing bank credit is costly in Kenya.
Lending rates are controlled by a disparate range of economic and regulatory factors, as
development literature has documented. In the latter part of this chapter, a range of barriers to
finance are explored with respect to the issues already addressed in this chapter. When
lending rates are high, and collateral requirements steep, enterprises suffer. Institutional
lenders are known to hedge against ‘risk’, as the experience of the UK, reviewed in chapter 3,
illustrated.98 Improving the quality of the private sector through increasing institutional
transparency might be one method to driving down the risk aversion pervading formal credit
96s 96
97FSD Kenya, Costs of Collateral (2009) (n 88) 98ch 3, 73
markets. Yet access to finance, this chapter suggests, is itself fundamental to supporting the
consolidation of good quality collateral. Legal instruments are likely to be valuable tools in
achieving these private sector development policies.
4.5.3 Business Informality and Financial Reporting Standards
Business informality and firm opaqueness driven by a weak financial disclosure
environment generate negative reputational effects on businesses, making credit access steep
because of the difficulty of establishing the soundness of collateral and creditworthiness.99
Business informality and low capital formation are inimical to asset tangibility, that is, the
consolidation of assets that can serve as good collateral.100 Other factors include general
regulatory arbitrage (as tax evasion, considered in the next chapter, suggests), and the non-
standardised application of the IFRS reporting template.
Kenya applies the International Financial Reporting Standards (IFRS) model in its
accounting and auditing practices, officially adopted in 1999.101The duty to apply IFRS,
however, is not statutory-based: it is the administrative edict of the Institute of Certified
Public Accountants of Kenya (ICPAK),102 but the duty to produce accounts is variously
mandated under securities-related laws including Companies,103Securities104 and Banking
Acts.105A World Bank Enterprise Survey in 2007, however, found that less than 50% of the
companies in Kenya employ an auditor on annual basis.106More problematic, however, is the
99Bengt and Tirole, Financial Intermediation (1997) (n 7) 663 - 66. 100ibid
101Interview with Mr. Evans Mulera, Director of Professional Services, Institute of Certified Public Accountants of Kenya (ICPAK offices, Nairobi, Kenya January 2010)
102ibid
103Companies Act of 1978 Cap 486 1962, ss 147-176, Laws of Kenya. 104Capital Markets Authority Act Cap 485A 1989, s 23, Laws of Kenya. 105Banking Act 1989, Cap 488 s 21, Laws of Kenya.
106World Bank, Enterprise Survey 2007 <
fact that the widely accepted accounting standards are, from a regulatory perspective, only
required of listed companies (that is, public companies) and other capital markets regulated
persons (for example, entities regulated by the Capital Markets Authority).107
According to a representative of a leading multinational tax and audit firm in Kenya –
“Most companies engage in special-purpose accounting – primarily to
comply with KRA requirements, hence driven by end-user of prepared
accounts. Implementing IFRS is expensive, and while Kenyan accountants
have the skills generally, the IFRS system requires continuing research and
engagement with international developments, and associated routine staff
training: most companies do not have the budgets for that. We can do it
because part of our market-leading role is grounded in a fully resourced
R&D unit, one of whose mandates is to keep constant tabs on happenings in
the IFRS field – these standards change almost on an annual basis, and to be
truly IFRS compliant, one would have to constantly update one’s systems
and skills. That is why IFRS compliance as a concept for most companies in
Kenya is a fairly relative concept in practice – and it will remain a tough task
for financial regulators to enforce here.”108
TX1 and TX2 echoed these viewpoints, with TX1 adding the observation that
“financial reporting, and the IFRS model, are really a question of economic development.”109
TX2 clarified that this means “when everybody plays by the same rules, conditions are
107Interviews with Mr. Mulera, Director, ICPAK (n 100) and with RG201, Financial Accounting, (CMA Offices, Nairobi, Kenya, January 2010).
108Interview with TX3, Legal and Tax Manager, Nairobi, Kenya, August 2009. 109Interview with TX1, Compliance Manager, Nairobi, Kenya, August 2009.
created for greater trust within the markets, which can promote greater synergy and
commercial partnerships between private companies.”110
These deductions were intriguing, and private equity fund managers were surveyed
for opinions over their levels of trust in Kenyan financial statements. A low 40% of
interviewed fund managers believe private company financial statements in Kenya present a
true and fair view of the corporation in question, and therefore can be relied upon. In contrast,
30% of the fund managers believe such accounts to be open to manipulation, carry minimum
disclosure, and therefore not in substantial compliance of IFRS standards – as chart 4.5,
below, demonstrates. As the chart shows, 8 questions were put to each interviewee, and the
statistical instances of answers to a ‘yes’/’no’ response matrix were captured. The first 5
questions elicit general opinions, and the last 3 questions interrogate the reasons for their
choices. Their responses are captured in chart 4.5 below.
It is significant that about 33% of the interviewees felt that financial statements in
Kenya are open to manipulation, and do not present a true and fair view of the corporation.
This group of fund managers also believed that reporting companies in Kenya do not disclose
fully, and did not comply with IFRS standards, opinions that generally support the deductive
observations of TX3.
In contrast, about 44% of the interviewees believed that Kenyan financial statements
presented an authoritative view of the reporting organisation, carried sufficient disclosure in
compliance with the IFRS reporting template, revealing a true and fair view of the company.
This group of fund managers consistently felt that financial accounting in Kenya was not
readily open to manipulation.
It was related earlier how a number of licensed stockbrokers went into financial
distress between 2007 and 2010, and RG201 was asked whether the failures were because of
poor financial accounting or the regulator’s inability to effectively police the sector. RG201
opined that –
“there were too many factors at play, and certainly, truthful accounting was
one of the key issues, but it cannot be said this was the main reason they
failed. Just a few entities have not done well, but most of the others are doing
alright. We cannot say the system is perfect, but there is a lot of effort into
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%