Lawmakers have expressed concern that financial institutions are inclined to auction debtors’ mortgaged property, suggesting that other remedies should also be applied as provided for by the law.
The legislation provides for four remedies in case of default of loan repayment by the mortgagor (a debtor who mortgaged an immovable property), but financial institutions such as banks use auction means only, MPs have heard.
The concern was highlighted on Monday, March 02, 2020 at Parliament during a session between the Parliamentary Standing Committee on Economy and Trade and the Rwanda Development Board (RDB) to discuss issues identified in the draft law relating to financial services consumer protection.
The bill is still under scrutiny at parliament.
The law of May 2010 modifying and complementing the law of May 2009 on mortgages stipulates that the mortgage contract shall contain clauses that grant the mortgagee (a creditor who received a mortgage) the power to manage, lease, sell or take over the mortgage in case of the mortgagor’s default.
Richard Kayibanda, the Registrar General at Rwanda Development Board (RDB) said that the four mortgagee’s remedies in case of default of payment as provided for by the law include leasing the mortgage (guarantee) and using the money generated from such activity to repay the bank loan.
Others are the management of the mortgage, such as hotel, by the bank so as to get money to recover the loan it provided to the customer; owning the property placed as collateral, and auctioning the mortgage.
"Practically, I can say that in 99.99 per cent of cases, banks prefer auctioning the mortgaged property,” he said pointing out that they do not want to get engaged in managing, leasing the property.
"The leasing arrangement has not been used so far,” he told parliamentarians.
He further added that auctioning is relatively quick because even the person who buys the property through such means puts pressure on the banks so that they get the property in question.
MP Théogène Munyangeyo, the Chairperson of the Parliamentary Standing Committee on Economy and Trade said that the situation in which banks consider property auction among the four options should be looked into.
"The banks do not allocate enough time to evaluate how the business proposals they give credit for can be made profitable and the reason is that they are not concerned about other alternatives as they only consider auctioning the property used as collateral,” he said.
Munyangeyo said that banks’ auction inclination implies that the projects to which they lend money are not appealing to them such that they would set up committees to manage them in case the owner has not been able to run them.
"Banks should offer loans when they are sure that the project being financed will be profitable, or if the project faces difficulties, they (banks) should share some responsibility,” he said.
He expressed worry in case of asset auction, the asset is at risk of devaluation, which he said inflicts a loss to both the creditor and the country’s economy.
"Sometimes, the value of the asset goes down to 50 per cent or even 30 per cent,” he said.
RDB’s Kayibanda said that the leasing and management of mortgages that are offered in Rwanda is a difficult task.
"Most often, the mortgages are residential houses, land not used for commercial activities. I don’t know how long it can take the bank to lease those properties and get back the money it lent. Managing them would also imply an additional cost,” he said.
MP Munyangeyo said that there should be experts who should consider the possibilities of such options.
It was also revealed during the session that lack of bargaining power of creditors makes banks decide what to do with the mortgage.