The government bill proposing a separate law for a secured transaction framework to facilitate particularly small borrowers get loans from banks by pledging their movable assets — such as ideas, copyrights, patents, farm produce and goodwill was approved by the Senate last Thursday.

The law is estimated to help double the lending to the SMEs and agriculture.

An official of the finance ministry said the two sectors face constraints in accessing the formal financial markets which obstructs their growth. One cause of this is their inability to offer tangible collateral which is acceptable to lenders.

A secured transaction framework is available for borrowers in many developed and developing states.

Experts say the current legal system does not provide for the creation of a security interest over moveable property and to secure the obligations owed by a customer to financial institutions; nor did it allow for registration of a security interest over movable property.

Additionally, the current legal regime only provides an ambiguous definition of moveable property, which has been clearly addressed in the proposed law and made more specific.

The bill has defined a movable property as ‘any tangible or intangible property’. These include rights under trust receipts, securities other than book-entry securities, title documents, negotiable instruments, intellectual property, goodwill, royalties, stock in trade, inventory, interest in partnership, ornaments, jewellery, stones, goods in transit, agriculture produce, leaves, grass, petroleum, minerals, and engine vehicles.

The law will enable small and medium enterprises and agriculture sector to access formal financial markets by using moveable assets as collateral

The essential elements of the proposed secured transaction regime are: ease of creation, availability of credit over all movable assets, access to all people, available for all debt, predictable priority rules and efficient and predictable enforcement rules.

The economic and commercial importance of the bill is significant. According to an Asian Development Bank report, a secured transaction legal regime that provides a transparent, certain and predictable environment for secured credit will provide greater access to credit for a wide category of borrowers.

It will facilitate a greater variety of credit through the employment of diverse financing techniques and enable credit to be made available for various lengths of time — short, medium and long-term.

The ADB in its report also estimates the impact of the proposed law on both micro and macro-level.

On the micro level, the access to finance will promote more business and commerce among a wide range of persons, which, in turn, shall result in an increase in the opportunities for business and commerce. On a macro-level, the domestic economy will expand and is likely to attract larger investment, both from domestic and overseas sources.

Although the benefit of the bill will be for all types of borrowers, the SME and agriculture sectors have been identified to benefit the most out of such reforms. The SME and agriculture sectors comprise mostly of non-corporate entities. The most likely assets that will be available to potential borrowers in the SME sector and possibly the small/landless farmers in the agriculture sector as security will be movable assets due to the nature of their businesses.

As per the proposed law, the federal government will establish the secured transactions registry for the purpose of housing and administering the electronic register that will record notices. The federal government will also appoint the registrar, deputy registrar and officers of the secured transactions registry. The registrar will manage and control the register of security interest.

The proposed bill aims to address the concerns of access to financing for small borrowers, and allows an increase in access to credit. The proposed law also clarifies, specifies the scope and meaning of movable property.

It provides general guidelines for creation of security interests over movable property and establishes secured transactions electronic registry.

Published in Dawn, Business & Finance weekly, June 20th, 2016