In 1971, three teachers who had pooled $1,350 to start a
coffee shop in Seattle needed additional capital to keep their
business running. They ended up borrowing $5,000 from a bank.
The start-up that they originally named Starbucks Coffee, Tea,
and Spice was able to get the financing it needed to grow and
expand, eventually becoming the Fortune 500 company we now know
Credit is the lifeblood of business. All firms, large and
small, need it to grow and thrive. However, access to credit
can be constrained, especially in developing countries.
According to the World Bank, more than half of private firms in
emerging markets have no access to credit. That figure rises to
80% in the Middle East and sub-Saharan Africa.
Banks in developing countries are usually reluctant to
accept movable assets as collateral due to the inadequate legal
and regulatory environment in which banks and firms co-exist.
In this context, movable assets become what is referred to as
dead capital. Movable assets, as opposed to fixed assets such
as land or buildings, often account for most of the capital
stock of private firms and comprise an especially large share
for micro, small and medium-size enterprises (SMEs). In the
developing world up to 80% of the capital stock of businesses
is typically in movable assets such as machinery, equipment or
receivables, while only 20% is in immovable property.
The availability – or otherwise – of
collateral is a binding constraint on financing. The relative
lack of collateral in less developed financial markets is one
of the main reasons firms in these regions are rejected when
they apply for bank credit.
The above applies to Egypt to a great extent. In addition,
banks in Egypt have a lot of unutilised liquidity. The numerous
initiatives to encourage micro-finance and lending to SMEs have
had a limited impact on the lending rate and one of the main
reasons is the lack of eligible collateral.
New secured transactions law
On November 15 2015, Egypt passed law number 115/2015
regulating the taking of security over movable assets (the
Movables Security Law). This law is considered a major reform
in the area of secured transactions in Egypt.
For the first time, the new law allows non-possessory
charges over movable property to exist. It introduces
collateral registries for movable assets as well as special
enforcement of securities.
The scope of the legislation
The law is primarily concerned with non-possessory
pledges/charges over movable property. Under the law all kinds
of movables can be used as collateral, whether existing or
future physical assets or moral rights. This includes:
receivables and credit notes; bank deposits or accounts;
equipment, tools and stock; trees; agriculture produce; farm
animals and birds; metals; as well as intellectual property
The law is limited to banks, and other financing
The Egyptian Financial Supervisory Authority (EFSA) will
set-up an electronic registry for collateral made pursuant to
the law and any amendments or cancellation thereof. The
registry fulfils two key functions: to notify parties about the
existence of a security interest in movable property (of
existing charges); and to establish the priority of creditors
vis-à-vis third parties.
Upon registration, collateral becomes:
(i) effective vis-à-vis third parties on the date and
time of registration. Any party, who has a legitimate interest
in the movable property, may object to the registration before
(ii) in an insolvency event, movables subject to a
registered collateral will not form part of debtor's assets,
provided registration occurred prior to commencement of the
insolvency proceedings; and
(iii) registered collateral grants the secured creditor
first rank security over the asset. This ranks higher than all
other forms of security or pledges provided by any other law,
with the exception of judicial expenses and enforcement
expenses of the security itself, and without prejudice to the
rights of possessory creditors under the Civil Code.
The enforcement regime introduced by the new law represents
a breakaway from the standard civil law system of enforcement.
Under the new law, creditors can directly recover their debt
from third party debtors of the borrower or directly sell the
pledged movables without a court order, as well as direct
set-off in the case of bank accounts. In the absence of
contractual authorisation for the afore-mentioned actions, the
creditor can always obtain a court order in a process that is
more simple than the normal enforcement of debt or securities
created under other laws.
It is noteworthy that, as the law provided banks with
flexibility and discretion when it comes to enforcement, the
law required banks to indemnify the debtor/guarantor and other
rights' holders against any damage caused by breach of the
The executive regulation is expected to be issued by
February 2016, and there is still a lot of work to be done to
implement the law and establish the registry. It is to be hoped
that the implementation will be as innovative as the law.
Overall, studies have shown that introducing collateral
registries for movable assets increases firms' access to bank
finance. There is also evidence that this effect is larger
among smaller and younger firms.