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A section of individuals and corporations are defaulting on loans and when lenders initiate processes to sell attached properties that were submitted as collateral, they get blocked by what experts term as loopholes in the law.

This has led to an increase in commercial cases around mortgage facilities leading to concerns among lenders in the local financial sector.

Ordinarily, when a creditor lends money taking a debtor’s property as collateral and the debtor defaults, the Mortgage Law and Registrar General’s instructions allow that the said property can be sold by the creditor or put under receivership.

Before a foreclosure takes place, the Registrar General (at Rwanda Development Board) must approve after reviewing the transactions.

However, even after the Registrar General’s go-ahead for foreclosure, borrowers find ways to keep their properties by initiating court procedures and now financial institutions want the process streamlined and the Mortgage Law clarified.

Borrowers have identified gaps within the law and are continually taking advantage to frustrate the legal foreclosure processes.

According to the Registrar General, Richard Kayibanda, his office has received complaints from different lenders.

"The main problem is that some borrowers run to courts without sound reasons, just for the sake of buying time and/or frustrating the loan recovery process,” Kayibanda told The New Times.

He added that they receive requests from defaulting borrowers to halt the auctions invoking several reasons such as property valuations, disagreement about the loan or outstanding amount. These are some of the cases that end up in court derailing the foreclosure process.

Kayibanda noted that the law gives rights to defaulting debtors to seek recourse in commercial courts if and when they are not content with the foreclosure process.

"This is a good thing as the aim is to ensure properties are adequately valued and that businesses with the prospects of being revamped are saved rather than closed down,” the Registrar general emphasised.

When the auction process commences, there is an assumption that the proceedings are meant to hinder enforcing of the collateral. However, Kayibanda says, initiating the insolvency process is to also ensure continuity of business.

Financial experts agree there is nothing wrong with borrowers going to court if they believe their rights have been violated in the process of executing foreclosure.

Maurice Toroitich the Managing Director of BPR Bank told The New Times that while aggrieved parties have the right to their matters addressed by a court, it should not serve to frustrate foreclosure processes that are contractual.

Toroitich noted that legal redress should not become a means for defaulters to frustrate a foreclosure process that is contractual and has been adjudicated according to the rules established under the Mortgage Law.

"Anything contrary to this also violates the rights of a lender to recover monies lent out based on securities governed by the Mortgage Law. It is therefore the duty of the judges to independently and objectively apply their skills to establish the right balance between justice for the borrower and justice for the lender,”

Toroitich added; "Justice for the lender is important to preserve because violation of a lender’s rights is tantamount to violation of the rights of bank depositors who provide the money that the bank lends.”

He recommended that going forward, it’s ideal to have a public debate to ensure that there are no unintended consequences of enacting a piece of law that may turn out to protect a specific interest but ends up causing more harm. 

Among the challenges that could stem from continued use of courts to frustrate foreclosure processes is banks losing interest in lending.

"It is important that there is predictability in the application of the Mortgage law. Any sense of doubt about whether a bank can efficiently recover a defaulted loan by the application of its rights under the loan contract and Mortgage law will lead to reduced appetite for lending which is ultimately not good for economic growth,”

Toroitich further warned that the lack of predictability of the application of Mortgage law in debt recovery risks slowing down the development of capital markets.

The possibility of asset backed securities will not be possible if mortgage contracts can be nullified without the lenders having an opportunity to defend their positions as happens in most cases where courts have nullified the Mortgage Registrar instructions to foreclose on a property.

George Odhiambo, the Managing Director of KCB Rwanda, called for all sector stakeholders to hold consultations to air concerns and find an agreeable way forward. The key stakeholders include the judiciary, Rwanda Development Board (Registrar General), and financiers.

"Sanctity of the secured creditor must be upheld at all times, unless the collateral registration can prove it was not obtained procedurally.”

Odhiambo fears that an increase in cases and court judgments overturning Registrar General’s instructions, could lead lenders to reconsider types of collaterals to accept with consequences to clients.

Kayibanda, the Registrar General, pointed out that since most debtors’ claims rotate around the under-valuation of the mortgaged property, the first intervention should be done by the Institute of the Real Property Valuers (IRPV).

This would include employing the international standard methodologies for appraising real properties such that there is no or less room to carry out the counter-valuations.

Kayibanda disclosed that they are currently amending insolvency law to ensure that gaps that ill-intentioned persons are exploiting are closed.

"We are also exploring the intervention that can be made at the level of commercial courts. We plan to advocate for the hearings on cases of counter—valuation during the auction process to be attended to as matters of priority,” said.