On March 02, 2020 at a session convening the Parliamentary Standing Committee on Economy and Trade and the Rwanda Development Board (RDB) to discuss issues in the draft law relating to financial services consumer protection, the auction process stood out.

They highlighted concerns over financial institutions that are inclined to auction debtors’ mortgaged property, suggesting that other remedies should also be applied as provided for by the law.

Some examples have proven that auction processes can be deceitful and tricky to laymen who have limited knowledge of the auctioning process.

The New Times spoke to Innocent Musominari, Head of Recovery Department at the Bank of Kigali to explain practical concepts of auctions. 

An auction is a system of buying and selling goods or services by offering them for bidding, allowing people to bid, and selling to the highest bidder. In the context of banks, loan guarantees are auctioned when the borrower failed to pay back monthly installments.

When applying for a loan, an applicant includes collateral; an immovable asset or any other guarantee given to the bank to be auctioned in the event agreed payback means default. The collateral value should be equivalent or above the amount of money offered as a loan. The value is determined by legally approved valuers.  

When does the bank carry out auction?

Normally the bank auction process is initiated when a borrower defaults on 3 consecutive monthly installments. The customer is sent reminders after 30 working days that s/he has failed to pay installments. Reminders are sent in forms of letters and phone calls.

A borrower can pay the installments and this reminder is withdrawn. A borrower can also submit his objection within 60 days with justification for the non-payment of equated monthly payments. In case no reply is received from the borrower or bank is not satisfied with the reply then bank can initiate the bank auction process. Once this notice expires after 60 days, the bank can auction the property after 30 days.

Who is involved in auctioning process?

After three notices, the bank reports to Rwanda Development Board that the said customer has failed to pay back with reference to collateral agreements. RDB, in which the asset is registered, appoints a receiver, a legally recognized lawyer whose job is to carry out the auctioning process.

When the bank decided to auction, it presents all the three reminding letters to RDB and suggest three receivers of their preference. The receiver is informed and required to accept or deny the offer.

When the receiver accepts, s/he informs all parties involved of terms and conditions under which the auction will be conducted. S/he values the asset under auction for the second time and places advertisements on radios and newspapers.

Basically, receivers are the most involved party in the auctioning process. Bank observes, RDB inspects and the borrower is always informed of each move taken towards the auction.

Transparency guaranteed?

All the parties mentioned above are informed on every decision taken leading to the auction. Any of the parties is entitled to more clarifications about the process. A receiver is obliged to report to RDB and portion the money to pay back the loan, advertisements, tax, and all other expenses made. He is entitled to 10 percent but not more than Rwf 10 million.

To make sure that the auctioned asset is in the buyer’s hands, receiver informs legal bailiff to execute the deal.

As Musominari explained faults in the auctioning process can occur in valuing the collateral or by the receiver. He, however, appeased fears over transparency that RDB which inspects the whole process has clear rules and regulations that go with severe punishments when breached.

Do auctions pay the debt back?

Musominari explained that there are cases where auctioning does not raise the amount of borrowed loan. For instance, when the bank is tricked by customers on the value of the collateral. In this case, money sold from collateral is lower than the required amount.

Ideally, the auctioned asset is sold at the price of its value. When the auction is announced and advertised for five times without a bidder, the receiver has no other option but to sell to the highest available bidder regardless of the price. In most cases, the loan is not entirely paid back because the highest bidder might be lower than the loan value.

When, despite the auction, the loan is not paid back, the bank takes the borrower to court to acquire right to auction other assets.

On that note, Musominari stressed that the latter is the most pressing challenge for banks.

"We are never happy to take our clients to courts. It destroys our reputation as a bank and its relationship with customers. But it is inevitable since losses can be overwhelming,” he said.