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 as Starbucks.
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 rights.
The law is limited to banks, and other financing institutions/corporations.
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 summary courts;
(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 enforcement proceedings.
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.
© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.