Determinants of the adoption of intangible assets as collateral in Kenya’s banking sector: an assessment of regulatory, institutional, operational and risk moderating factors

Abstract

This study investigates the key determinants influencing the adoption of intangible assets as collateral among banks in Kenya, focusing on legal, institutional, operational, and systemic factors. It aims to evaluate the readiness of banks in Kenya to adopt intangible assets as collateral, the effectiveness of existing legal frameworks in supporting intangible based lending, and the systemic needs within Kenya’s financial ecosystem to support intangible assets backed lending. It is Anchored in Agency Theory, Information Asymmetry Theory, Signaling Theory, and the Resource-Based View, the research explores how valuation uncertainty, enforceability risks, and informational gaps between borrowers and lenders impact the acceptance of intangible assets in credit markets. Employing a pragmatic research philosophy, the study integrates both quantitative and qualitative methods to provide a multidimensional analysis. The findings indicate that the use of intangible assets as collateral remains significantly limited. Only 25% of Tier 1 banks partially accept IAs, while the majority continue to prioritize tangible assets due to perceived legal and valuation risks. The regulatory environment emerged as the most significant barrier (β = -1.18, p < 0.001), compounded by high risk perception, with 85% of banks viewing IAs as high-risk collateral. A strong correlation between legal uncertainty and risk perception (r = 0.72, p < 0.001) underscores the role of regulatory clarity in shaping lending behavior. Notably, Tier 1 banks displayed a greater willingness to explore innovative collateral frameworks compared to smaller institutions. The study also identifies two key moderating variables— development of secondary markets for intangible assets and the implementation of robust risk mitigation frameworks—which can reduce the impact of regulatory and institutional barriers. While the Movable Property Security Rights Act offers a legal foundation for intangible assets collateralization, practical adoption is hindered by operational limitations, inadequate policy enforcement, and low financial literacy regarding intangible assets evaluation. In conclusion, the study highlights a market failure in SME financing, where knowledge-based enterprises are constrained by limited access to credit due to the underutilization of intangible assets. It recommends regulatory reforms, standardized valuation models, and the adoption of fintech driven risk assessment tools to foster the use of intangible assets as collateral. The findings offer insights for banks, regulators, and SMEs, emphasizing the need for ecosystem-wide innovations to unlock the full potential of intangible asset-based lending in Kenya’s financial sector. Key words: Collateralization, Regulatory environment, Risk perception, Market development, SME financing, Credit access, Innovation.