Concept Paper: The Case for Securitization in Kenya
Executive Summary
This concept paper explores the transformative potential of securitization in Kenya’s financial
landscape. It provides a comprehensive overview of securitization, outlining its process,
objectives, and benefits. By leveraging securitization, institutions can address critical challenges
such as liquidity constraints, government debt, and underdeveloped investment markets, while
fostering economic resilience.
The paper delves into specific applications of securitization in Kenya, including microfinance
institutions, auto loan companies, mobile money receivables, and bank loans. These models
showcase how securitization can unlock capital, diversify investment options, and attract both
local and foreign investors.
Furthermore, a comparative analysis highlights Kenya’s advantages over other emerging
markets, emphasizing the country’s conducive regulatory framework, growing market demand,
and dynamic credit needs. The paper concludes that securitization is not only viable but essential
for addressing Kenya’s fiscal and economic challenges, offering a pathway to a more robust and
inclusive financial system.
An Overview of Securitization
What is it?
Securitization is the process by which sovereign entities(governments) or financial institutions
convert their illiquid assets such as loans, mortgages and other receivables in to tradable
securities. This process involves several key steps and entities that will be expounded upon
below.
How does it work?
1. Origination- A lender, also known as the originator, (which can be any companies or
entities that are characterized by financial stability as well as standardized and centralized
servicing of debt) give loans to lenders and overtime develop a portfolio of illiquid return
earning assets
2. Special Purpose Vehicle- The originator then sells this portfolio of loans to a Special
Purpose Vehicle. The special purpose vehicle (SPV) is an independent, specially formed,
single-purpose entity that purchases the loans from the originator. The SPV must be
insulated to ensure that events that happen to the originator, such as bankruptcy, do not
affect it. This is referred to as making the SPV ‘bankruptcy remote’. Secondly, it must be
ensured that the transfer of funds from the originator to the SPV cannot be interfered
with. This is achieved through a ‘true sale’ of receivables.
3. Structuring and Credit Enhancement- The SPV divides these loans into slices called
tranches which are arranged based on common characteristics such as size, term or risk
levels determined by a Credit Rating Agency. The SPV may enhance the creditworthiness
of the securities through mechanisms such as over collateralization, third party
guarantees, among several others.
4. Issuance of securities- The SPV finally issues the relevant Asset Backed Securities to
investors, whose capital investment is used by the SPV to pay the Originator for the
loans.
5. Distribution- Investment banks or brokers facilitate the sale of these securities to
investors, such as pension funds, insurance companies, and retail investors.
6. Servicing and Monitoring- A servicer, often the original lender, manages the underlying
assets, ensuring loan repayments and distributing cash flows to investors.
7. Repayment and Maturity- Investors receive periodic payments based on the
performance of the underlying assets until the maturity of the assets.
What was the purpose of Securitization
Securitization was invented to address key challenges in financial markets, particularly the need
for liquidity, risk management, and efficient capital allocation. Its origins trace back to the
United States in the 1970s when banks faced liquidity shortages and interest rate mismatches.
These issues arose because banks issued fixed-rate mortgages but funded them with short-term,
floating-rate deposits, leading to financial strain during periods of inflation.
The process of securitization, which involves pooling illiquid financial assets like mortgages or
loans and converting them into marketable securities, allowed banks to offload these assets. This
freed up capital, enabling them to issue more loans and manage risks better. It also created new
investment opportunities for institutional investors by offering securities with varying risk
profiles, tailored to their preferences. Over time, securitization expanded globally as a tool to
enhance liquidity, diversify risk, and meet the growing demand for credit in both developed and
emerging markets.
Why is Securitization relevant to the Kenyan Market?
Securitization offers a transformative opportunity for Kenya’s financial system, especially in
addressing critical challenges such as liquidity constraints, government debt burden, and
underdeveloped investment markets. The regulatory frameworks exist and so do the two most
fundamental drivers of Securitizations success according to several authors such as A
Saayman(2005) which are: (i) when regulations favour securitisation or (ii) when there exists a
strong demand for and supply of asset- and mortgage-backed securities. By embracing
securitization, Kenya can unlock capital, attract foreign and local investments, and strengthen its
financial sector amidst growing regulatory and economic pressures.
Addressing Liquidity Challenges
Kenya’s banking sector is grappling with liquidity pressures as highlighted by the December
2024 report on the capital shortfalls facing 12 banks. These institutions must raise a combined
Ksh11.85 billion by December 2025 to meet the new minimum core capital requirement of Ksh3
billion, with the threshold set to rise to Ksh10 billion by 2029. This regulatory pressure
underscores a pressing need for innovative solutions to bolster capital reserves and enhance
resilience. The solution that the Central Bank of Kenya gave was to lower the minimum reserve
requirements for Banks but this can have devastating effects on the macroeconomic stability of
Kenya.
Securitization provides a more practical lifeline by enabling banks to convert illiquid assets, such
as loan portfolios, into tradeable securities. By selling these securities to investors, banks can
free up capital, reduce their balance sheet risks, and meet regulatory requirements without
relying solely on costly equity financing or mergers. Smaller institutions like Consolidated Bank
and HFC, which face significant shortfalls, could particularly benefit from this mechanism to
stabilize and grow.
Easing the Government’s Debt Burden
Kenya’s public debt, exacerbated by borrowing for infrastructure projects and recurrent
expenditure, is placing immense strain on the economy. Securitization offers a way to ease this
burden by shifting financing for key projects to the private sector. For example:
1. Infrastructure Financing: Instead of relying on government-backed loans, securitization
can package future toll road revenues, airport fees, or energy project receivables into
securities sold to private investors.
2. Affordable Housing: Mortgage-backed securities (MBS) can attract investments into the
housing sector, allowing the government to focus its resources on other pressing
priorities.
3. Reducing Guarantees: With securitization, the government can limit the need for direct
guarantees on debt, thus mitigating fiscal risks.
Diversifying Investment Options
Kenya’s investment landscape remains relatively narrow, with limited options for institutional
and retail investors. Securitization can change this by introducing new asset classes like:

Mortgage-Backed Securities (MBS): Opening avenues for housing finance companies
to raise funds while offering investors stable, long-term returns.

Asset-Backed Securities (ABS): Allowing businesses to monetize receivables from
sectors like agriculture, fintech, and trade, thus spurring economic activity.

Infrastructure-Backed Securities: Providing stable, inflation-linked returns, appealing
to both local pension funds and international investors.
Securitization also aligns well with Kenya’s aspirations to attract more foreign direct investment
(FDI). Currently, FDI inflows remain low due to perceived risks and limited diversification
opportunities. Asset-backed securities with predictable cash flows and credit enhancements can
significantly reduce these barriers, drawing interest from international capital markets.
Meeting Genuine Market Demand
The Kenyan economy is characterized by a growing need for credit across sectors such as SMEs,
agriculture, housing, and renewable energy. Traditional financing methods cannot keep pace with
this demand due to structural limitations in the banking sector and fiscal pressures on the
government. Securitization can:

Expand Credit Supply: By recycling capital, financial institutions can extend more
loans to underserved sectors.

Lower Borrowing Costs: Investors competing for high-quality securitized assets can
drive down interest rates, making credit more affordable.

Boost Financial Sector Resilience: A diversified funding base ensures that banks and
businesses can withstand economic shocks.
Conclusion
Securitization is not just an opportunity but a necessity for Kenya. It addresses the urgent
liquidity needs of banks, reduces the government’s fiscal pressures, and provides a gateway to
broader investment opportunities. With proper regulatory frameworks and awareness campaigns,
securitization can unlock Kenya’s economic potential, reshaping the financial landscape while
attracting both local and foreign investments. As regulatory deadlines and financial challenges
loom, the adoption of securitization could be a decisive step toward a more resilient and vibrant
economy.
How does Kenya compare to other emerging markets that have Securitized assets?
Comparative Table: Obstacles to Securitization in South Africa, India, and the
Environment in Kenya
Aspect
South Africa
India
Regulatory
Framework
Unclear and restrictive,
including contradictory
SARB regulations and
accounting standards
undermining SPVs'
bankruptcy remoteness.
No dedicated
Clear regulations
securitization law; true
supporting securitization.
sale and bankruptcy
Legal clarity enables
remote structures lacking.
smooth asset transfers
Stamp duties up to 10% in
and investor confidence.
some states
Taxation
High taxes, including VAT
Favorable taxation
Double taxation risks; no
on servicer fees and stamp
regime reduces
tax neutrality for SPVs
duties on securities
transaction costs.
Market
Liquidity
Weak debt market; low
Lack of a secondary
appetite for long-term
market; no market makers
exposure
Investor
Awareness
Limited trust in rating
agencies; securitization
perceived as a tool for
struggling companies
Historical
Issues
Robust secondary
markets with high
liquidity and active
market participants.
High investor education
Poor investor
and active participation
understanding of
from institutional
securitization instruments
investors.
High legal and structuring
Stamp duties and high
costs, making
Cost of
structuring costs hinder
Transactions securitization unviable for
transactions
small asset pools
Negative perceptions due
to past scandals like the
Masterbond scandal,
discouraging growth
Kenya
Lower transaction costs
due to efficient processes
and reduced fees.
No significant historical
Positive track record in
controversies, but limited
implementing
precedent for complex
securitization projects.
securitization
Minimal, no guarantees
No direct government
Government
like those in the USA (e.g., incentives for
Support
Ginnie Mae)
securitization
Analysis of Kenya's Advantage
Kenya's conducive securitization environment stems from:
Government initiatives
encourage market
growth and investor
trust.
1. Robust Regulation: Clear progressive legal and regulatory frameworks provide certainty
for market participants.
2. Efficient Taxation: Favorable tax policies reduce costs, enhancing profitability.
3. Market Development: Active secondary markets and a well-informed investor base
support liquidity.
4. Government Incentives: Policies that foster securitization as a financing tool for
infrastructure and other sectors.
This contrasts with South Africa and India, where regulatory ambiguity, high costs, and market
immaturity hinder securitization growth.
Comparative Analysis: Market Demand for Securitization in Kenya vs South Africa
Securitization relies heavily on market demand from both investors and originators. Kenya and
South Africa present stark contrasts in this regard, particularly concerning the role of financial
institutions, the need for liquidity, and capital accessibility.
Market Demand: Kenya's Advantage
In Kenya, market demand for securitization is fueled by:
1. Liquidity Constraints:
o
Kenyan banks and financial institutions often face liquidity challenges, driven by
high demand for credit, limited access to foreign capital, and systemic reliance on
short-term deposits to fund long-term loans.
o
Securitization offers a viable solution, enabling originators (banks, housing
finance companies, microfinance institutions) to free up capital by selling loan
portfolios to Special Purpose Vehicles (SPVs). This creates room for issuing new
loans, ensuring they can meet credit demand.
2. Access to Capital:
o
Kenyan originators often struggle with obtaining affordable capital from
traditional sources, such as bonds or equity markets, due to underdeveloped local
capital markets.
o
Securitization provides a way to tap into institutional investors like pension funds
and insurance companies, offering these investors high-quality securities backed
by income-generating assets.
3. Growing Investor Appetite:
o
Kenya’s financial ecosystem has a growing pool of institutional investors who
view securitization as a secure and diversified investment option.
o
High demand for asset-backed securities is bolstered by government initiatives
aimed at promoting infrastructure development, housing, and small business
financing, all of which align well with securitization.
4. Dynamic Credit Needs:
o
Kenya’s economy has sectors with untapped potential, such as real estate,
agriculture, and fintech lending, which require innovative financing solutions like
securitization.
Market Demand: South Africa’s Challenges
In contrast, South Africa’s securitization market faces sluggish growth in demand due to:
1. Absence of Liquidity Pressures:
o
South African banks are generally well-capitalized and enjoy robust liquidity,
minimizing the necessity of securitization as a funding tool.
o
Unlike Kenyan banks, South African banks have strong asset bases and easy
access to alternative funding sources, such as corporate bonds, foreign capital, and
equity markets.
o
Historically, South African banks have preferred holding assets on their balance
sheets, as they view asset size as a measure of strength and stability in a
competitive market.
2. Limited Need for Capital Recycling:
o
Since liquidity constraints are minimal, South African banks do not feel pressured
to offload assets to generate capital for new loans.
o
The well-developed local bond market allows corporates and banks to raise funds
directly, reducing reliance on securitization.
3. Lack of Urgency:
o
South African banks have sufficient internal reserves and favorable lending
conditions, meaning there is little need to explore securitization aggressively.
o
Regulatory and institutional challenges, including high costs and complex
compliance requirements, further reduce the incentive for banks to securitize their
assets.
Key Comparisons
Aspect
Kenya
South Africa
Liquidity
Banks face significant liquidity
Banks are well-capitalized and do not face
challenges, making securitization an liquidity shortages, diminishing the need
attractive option to free up capital. for securitization.
Capital
Accessibility
Limited access to affordable, longterm capital makes securitization
vital for funding growth.
Easy access to alternative funding sources
like corporate bonds and international
capital.
Investor
Appetite
Institutional investors are eager to
invest in high-quality securities to
diversify their portfolios.
Investor confidence is hindered by low
trust in rating agencies and perceptions of
securitization as a tool for distressed
entities.
Demand for
Credit
High demand for credit in
underserved sectors creates
opportunities for securitization.
Moderate demand for securitized products
due to a more mature financial market and
diverse funding alternatives.
Regulatory
Support
Proactive policies and frameworks
encourage securitization as a key
tool for economic development.
Regulatory uncertainty and historical
scandals (e.g., Masterbond) limit market
growth.
How Kenyan Banks Leverage Securitization
1. Portfolio Churning:
o
Kenyan originators can use securitization to remove illiquid assets like mortgage
and SME loans from their balance sheets. This allows them to raise immediate
capital while reducing risk exposure.
2. Access to Broader Markets:
o
By pooling loans into securities, Kenyan institutions can access a larger pool of
investors, including international ones, who are keen to invest in emerging market
debt.
3. Funding Infrastructure Development:
o
Securitization is increasingly being used to fund large-scale projects in Kenya,
such as affordable housing and renewable energy, which align with government
priorities.
South Africa’s Missed Opportunities
1. Reluctance to Securitize:
o
Banks in South Africa perceive securitization as unnecessary due to their strong
balance sheets and lack of liquidity constraints.
o
Large banks dominate the financial sector and prefer to hold onto assets rather
than securitize, given the perception that size equates to stability.
2. Regulatory Barriers:
o
Complex regulatory requirements and the lack of supportive frameworks have
made securitization less appealing compared to traditional funding methods.
3. Market Perceptions:
o
Historical scandals and a lack of trust in rating agencies have further discouraged
investors, resulting in limited demand for asset-backed securities.
Kenya’s securitization market thrives on a dynamic interplay of high demand for credit, liquidity
challenges, and innovative regulatory support. In contrast, South Africa’s mature financial
ecosystem, coupled with strong bank liquidity and readily available capital, creates a less
conducive environment for securitization. For South Africa to realize the potential of
securitization, it would require a shift in perception, stronger regulatory clarity, and strategic
incentives for originators to participate actively in the market.
Where can it be applied?
1. Securitization for Microfinance Institutions (MFIs)
Description:
Microfinance Institutions provide small loans to underserved populations, often without
traditional collateral. Securitization helps MFIs access broader funding sources.
1. Asset Pooling:
o
The MFI identifies a pool of loans with similar characteristics, such as repayment
history or borrower demographics.
2. Special Purpose Vehicle (SPV):
o
The loans are sold to an SPV, a separate legal entity that isolates the risk from the
MFI.
3. Issuance of Securities:
o
The SPV issues securities (e.g., bonds) backed by the cash flows from the pooled
loans.
4. Investor Funding:
o
Investors purchase these securities, providing capital to the SPV, which in turn is
used to fund new loans by the MFI.
5. Cash Flow Distribution:
o
Borrowers' repayments (principal and interest) are collected and distributed to
investors through the SPV.
Key Considerations:

High credit risk requires credit enhancements like guarantees or insurance.

Regulatory compliance is critical.
I am currently in the process of assessing the Swift ltd Micro Finance Institution who have
shown eagerness to raise funds and good promise in terms of their loan portfolio.
Illustrative Diagram:
MFI (Loan Originator)
↓
Transfers Loans
↓
SPV
(Buys Loans & Issues Securities)
↓
Investors (Buys Securities)
↑
Borrower Repayments (Cash Flows)
2. Securitization for Auto Loan Companies (e.g., Watu Credit or Mogo)
Description:
Auto loan companies issue loans to customers for purchasing vehicles. Securitization allows
these companies to monetize their loan books.
1. Asset Pooling:
o
Auto loans are bundled based on factors like vehicle type, loan term, and
creditworthiness.
2. SPV Setup:
o
The SPV acquires the loan pool and isolates it from the auto loan company’s
balance sheet.
3. Tranche Structuring:
o
Securities are divided into tranches (senior, mezzanine, junior) based on risk and
return profiles.
4. Investor Funding:
o
Investors, such as pension funds or mutual funds, buy these tranches.
5. Repayment Distribution:
o
Borrowers’ repayments are channeled to the SPV, which distributes them to
investors based on tranche hierarchy.
Key Considerations:

Asset depreciation risk is significant.

Prepayment risk may impact cash flow predictability.

Watu mainly finance through foreign debt which is expensive and liable to currency risks
this offers securitizing their 2 million odd loans an attractive alternative
Illustrative Diagram:
Auto Loan Company
↓
Sells Loan Pool
↓
SPV
(Tranches Loans into Securities)
↓
Investors (Purchase Tranches)
↑
Borrower Repayments (Cash Flows)
3. Securitization of Mobile Money Receivables
Description:
Mobile money platforms generate receivables from small, frequent transactions. Securitization
monetizes these receivables for capital needs.
1. Receivable Pooling:
o
Aggregates daily or monthly mobile money receivables.
2. SPV Setup:
o
The SPV acquires the receivables and issues securities.
3. Dynamic Securitization:
o
Rolling pools may be used to securitize new receivables continually.
4. Investor Subscription:
o
Investors subscribe to securities with expected cash flows backed by receivables.
5. Payment Flows:
o
Cash flows from mobile money transactions are directed to the SPV for
distribution.
Key Considerations:

Risks include transaction volume fluctuation and platform performance.

Innovative structures like blockchain can enhance transparency.
Illustrative Diagram:
Mobile Money Operator
↓
Transfers Receivables
↓
SPV
(Issues Securities)
↓
Investors (Purchase Securities)
↑
Customer Transactions (Cash Flows)
4. Securitization of Bank Loans
Description:
Banks securitize loans (e.g., mortgages, personal loans) to free up regulatory capital and
diversify risk.
1. Loan Pooling:
o
Loans are grouped based on credit quality, interest rate, and maturity.
2. SPV Setup:
o
The SPV buys the loans and removes them from the bank’s balance sheet.
3. Tranche Structuring:
o
Securities are structured in tranches to cater to different investor appetites.
4. Credit Enhancement:
o
Mechanisms like over-collateralization or guarantees reduce risk.
5. Investor Funding:
o
Institutional and retail investors buy the securities.
6. Cash Flow Management:
o
Loan repayments are funneled to the SPV and allocated to investors.
Key Considerations:

Credit risk and prepayment risk are central concerns.

Compliance with Basel III regulations is vital.
Illustrative Diagram:
Bank (Loan Originator)
↓
Transfers Loans
↓
SPV
(Issues Structured Securities)
↓
Investors (Purchase Securities)
↑
Borrower Repayments (Cash Flows)
Commonalities Across Models:
1. SPV: Essential for isolating risk.
2. Tranching: Tailors securities to different risk profiles.
3. Credit Enhancements: Improve investor confidence.
4. Cash Flow Distribution: Ensures transparent allocation of borrower repayments.
Conclusion
Securitization presents a vital opportunity for Kenya to enhance liquidity, diversify investment
options, and attract foreign direct investment while addressing pressing financial challenges. The
models outlined in this paper demonstrate how securitization can transform sectors such as
microfinance, auto loans, mobile money, and banking by monetizing assets and recycling capital.
However, the implementation of securitization comes with potential challenges, including
regulatory compliance, credit risks, and market readiness. Solutions to these challenges are
addressed in a separate presentation document, which I am prepared to share and present to the
team. This supplementary presentation offers detailed strategies to navigate obstacles and
optimize securitization’s success in Kenya.
With a strategic approach and robust stakeholder collaboration, securitization can unlock
Kenya’s economic potential and reshape its financial landscape.