Expanded scope of hire purchase business

Notably, the Bill defines a hire purchase agreement to include a sale and loan agreement under which the whole or part of the purchase price is financed by the seller or by a third party that is engaged in the business of lending money.

The HPA excludes certain types of agreements and entities from its application, but under the Bill there are no monetary exceptions and, as presently drafted, all persons engaged in hire purchase business must be licensed.

It would be useful if the Bill excluded from registration those financial institutions already licensed by the Central Bank of Kenya (CBK) to mitigate bureaucracy and potential duplication. 

Registration to carry on hire purchase business

The HPA currently requires any person carrying on hire purchase business to obtain a valid licence and the Bill provides for a transition of hire purchase licences issued under the HPA. If the Bill is passed into law, persons intending to carry on hire purchase business will be required to make an application to the registrar under the MPSRA (Registrar) and some of the considerations the Registrar will take into consideration include (i) the applicant’s financial condition and history, (ii) the character of the applicant’s management and (iii) the professional and moral suitability of the applicant’s management.

In contrast, the current considerations under the HPA include the applicant’s financial condition and the manner in which the applicant has conducted any hire purchase business (currently or in the past) . Under the Bill, the Registrar will need to be satisfied of not only the soundness of the business but also the people in control of the business. The test or standards to be applied by the Registrar in this regard are, however, not specified.

The Registrar may, upon review of the application, grant the licence with or without conditions or refuse to grant the licence. Regrettably, the Bill does not provide for a mechanism for appeal of the Registrar’s decision to refuse to grant a licence.

Interest rates for hire purchase agreements

The Bill provides that the CBK shall determine the interest rates for the hire purchase of goods under hire purchase agreements. It is not clear whether the CBK will be assessing the interest rates set by hire purchase businesses or will prescribe a particular interest rate, but constrained interest rate change procedures will likely make the business of hire purchase cumbersome and less attractive.

Repossession of goods sold under hire purchase

Under the HPA, where a buyer has paid more than two thirds of the purchase price, the seller can only repossess the goods after obtaining a court order. With the proposed repeal of the HPA, the Bill does not contain a similar provision and it appears that there will be no prescribed restrictions on repossession upon default.

Registration of charges created by companies under the Companies Act

Section 878 of the Companies Act requires certain charges created by a company or over a company’s property to be registered at the Companies Registry. There has been confusion regarding the necessity to register movable security over assets such as book debts under both the Companies Act and the MPSRA. The Bill proposes to clarify this by specifically, among others, excluding book debts from the charges to which the Companies Act applies.

Compulsory registration of amendment/cancellation notice by the Registrar

The Bill proposes to amend the MPSRA to allow a borrower that gave security to request the Registrar to intervene and have the security registration notice cancelled, for instance where the security right has been extinguished. It is not uncommon to have secured creditors that have failed to cancel registration notices by failing to prioritise or through loss of credentials to the portal and this proposed change will be a welcome relief to borrowers. The Registrar will give notice to the secured creditor before cancelling the registration.

Conclusion

If passed into law, the Bill will be a significant milestone in the effective regulation of transactions involving creation of security over movable property as well as hire purchase businesses.