Why your land title may no longer secure you a loan

For years, if you wanted a large loan, you would take your title deed over to the bank.

That document alone was often enough to secure credit. Not anymore. Today, lenders are struggling with loan books and inventory full of repossessed homes and land that they cannot sell.

When borrowers default, banks turn to auctions—but buyers are increasingly scarce, according to auctioneers who spoke to The Standard.      

This means that the long-standing practice of using property as the primary loan guarantee, before it started being looked at as doubtful security by lenders about a decade ago, as the bad loans crisis hit their bottom lines, is now almost entirely forcing the sector to rethink how it operates.     

Faced with the prospect of hundreds of billions of shillings in loans that may never be recovered, banks are now deploying new recovery tactics and rewriting their rulebooks: simply owning property may no longer open the doors to credit.     

The scale of the crisis is clear in the data provided by banks. Gross non-performing loans (NPLs)—debts unpaid for more than 90 days—have ballooned to a staggering Sh731.8 billion.

In response, top-tier banks have built a Sh298.1 billion war chest to cover anticipated losses, a 20 per cent increase from the previous year.    

“Land alone is no longer bankable,” a senior risk manager at a leading bank told The Standard.

“We are holding properties worth billions that no one wants to buy. When collateral cannot be sold, the loan is essentially lost.”     

The auction market has become particularly congested. John Kamau, a Naivasha-based auctioneer, noted that the flood of repossessed cars, land, and houses has made auctions increasingly unviable.  

“Even when land is listed, there are no buyers,” Kamau said. “Banks are being forced to look beyond auctions and negotiate directly with defaulters.” 

With physical collateral proving unreliable, lenders are adopting a mix of aggressive digital tools and flexible arrangements.   

On one end, some banks have introduced systems that automatically recover loan repayments. If a borrower misses a payment, funds can be drawn directly from their other accounts with the same bank, such as savings or fixed deposits.     

“This is a digital safety net that doesn’t depend on selling tangible assets,” explained the risk manager, who sought anonymity.

“The bank effectively places a first claim on all your liquid funds held with them.”  

On the other hand, several institutions are taking a more lenient approach by restructuring billions of shillings in personal and business loans, offering extended repayment periods to customers in genuine distress.     

Analysts and bankers said the collapse of the property-collateral model is driving a bigger change in banking philosophy.

Lenders are increasingly being forced to look past static assets to focus on a borrower’s cash flow—regular salary deposits or business revenue.    

“We now prioritise an active, income-generating bank account as a key condition for lending,” the risk manager said. “In today’s market, a steady paycheck is often more valuable than a title deed.”     

Analysts warn that this shift could exclude small business owners and individuals whose wealth is locked in land, worsening the credit crunch for those most in need.   

Adding to the sector’s transformation is a regulatory overhaul. The Central Bank of Kenya (CBK), frustrated with the slow transmission of its rate cuts to borrowers, has rolled out a new loan-pricing framework.   

Major banks are now adopting this model, which ties variable-interest loans to a transparent benchmark—the Kenya Shilling Overnight Interbank Average (KESONIA)—plus an individual risk premium.    

KESONIA, which became effective yesterday for existing loans and takes effect on February 28 for new loans, will see the CBK publish an overnight interbank exchange rate.

This will then be used by banks to price their interest rates around it, after taking care of their operational costs, expected return on shareholder investment, and, most importantly, the borrower's individual risk profile.     

This means that borrowers with good credit scores are expected to secure lower premiums and thus, lower overall rates.   

Previously, banks relied on the Central Bank Rate (CBR) published every two months, but most have been reluctant to lower their interest rates in tandem with the CBR because they reckoned it did not appropriately factor in borrowers’ risk profiles.        

CBK Governor Kamau Thugge has said the new system should ensure that when the central bank lowers its policy rate, “customers will see an immediate reduction in their interest rates.” The goal is greater transparency and more effective monetary policy in a strained economy, according to the CBK.   

The CBK had earlier identified the “Personal and Household” sector as the epicentre of the bad-loan crisis, with 44 per cent of banks predicting further defaults.     

Many families have borrowed to cover basics like school fees and food, only to fall behind on repayments. In turn, more than 80 per cent of lenders plan to intensify collection efforts against households, leading to a rise in asset seizures.     

Bankers and analysts now agree that the decline of land as the king of collateral marks a pivotal moment for Kenyan finance.     

“Banks are being forced to abandon decades-old practices and innovate under tremendous pressure,” said a senior banker who asked not to be named.

“This could lead to a more modern, cash-flow-based lending system in the long run. But in the short term, it means tighter credit, more aggressive recoveries, and real pain for both borrowers and banks.”     

He added: “We’re moving from asking, ‘What do you own?’ to ‘Can you pay, and how can we ensure that you do?’ It’s a difficult but necessary evolution.”