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Access to credit facilities by SMEs in Kenya

This article is provided by Muriithi & Ndonye Advocates.


One of the constraints that limit the development of SMEs is lack of access to credit facilities. Collateral requirement by financial institutions/creditors make it even harder for SMEs to access credit as SMEs are usually characterized by low capital base and lack of resources. Collateral on the other hand, furnishes the creditor with a resource to be sold or possessed in case of the debtor’s failure to meet his or her financial obligation.

 This article explores legal regimes on access to credit that may be exploited by SMEs to enable them obtain credit.

 Chattels Transfer Act

 The Act defines a chattel to mean movable property that can be completely transferred by delivery, and includes machinery, stock and the natural increase of stock as hereinafter mentioned, crops and wool but does not include;

 (a)     Title deeds, choses in action or negotiable instruments;

 (b)    Shares and interests in the stock, funds or securities of any government or local authority;

 (c)    Shares and interests in the capital or property of any company or other corporate body; or

 (d)     Debentures and interest coupons issued by any government, or local authority, or company, or other corporate body;

From the definition of a chattel, SMEs may utilize the provisions of Chattels Transfer Act to secure credit facilities by creating chattel securities.

Using the law of chattels different instruments may be created to secure credit facilities amongst them, chattel mortgage, a lien, a power of attorney etc. The instrument creating the security must however be registered by the Registrar General.

Companies Act

The law of companies allows companies to create debentures to secure credit facilities. A debenture is thus signed by the borrower in favour of the lender.

The Companies Act provides the legal regime for the registration of debentures and the issuance of a Certificate of Registration of Mortgage as evidence of the said registration.

The issuing of a debenture by a company is done pursuant to powers conferred to the company by its Memorandum and Articles of Association. In practice, in addition to the said powers a resolution by the Board of Directors of the company allowing creation of the debenture will be prepared and executed by the directors of the company

The Debenture contains covenants by the Company:

(a) not without the prior written consent of the Bank to part with possession, transfer, sell, lease or otherwise dispose of the Assets or any part thereof or attempt or agree so to do (except in the case of stock in trade which may be sold at market value in the usual course of trading as now conducted and for the purpose of carrying on the Company's business).

 (b) not without the prior consent in writing of the Bank to create attempt to create or permit to subsist any mortgage debenture charge pledge or lien or other security interest over any of the Assets or any parts thereof.

The Debenture creates security by way of a fixed and floating charge over all the Company's present and future undertaking, goodwill, property, assets, rights and revenues (including, without limitation, all book and other debts and monetary claims (including, without limitation, deposits and credit balances held with the Bank or third parties from time to time and things in action which give rise to any such debt or claim) now or at any time hereafter due or owing to the Company, together with the full benefit of all guarantees and securities therefor and indemnities in respect thereof and all negotiable instruments, liens, reservations of title, rights of tracing and other rights enabling the Company to enforce any such debts or claims), whatsoever and wheresoever situate (the “Assets”).

If the Company creates or attempts to create any encumbrance over any of the Assets charged by way of floating charge without the prior consent in writing of the Bank or if any person levies or attempts to levy any distress, execution, sequestration or other process against any of the Assets charged by way of floating charge, the said floating charge shall automatically without notice crystallize and operate as a fixed charge instantly such event occurs.

The security created by the Debenture is a continuing security.

The assets that may be utilized to create a debenture are well within the reach of many SMES thus making debentures a viable option for securing credit facility.

Copyright © 2016 Diamond Trust Bank. All Rights Reserved.

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