Last year, Parliament passed a law forcing financial institutions to accept movable properties like livestock, patents, land operating rights, agricultural products, land ownership rights, warehouse receipts, and intellectual property rights, as collateral. The central bank is betting this will fundamentally change the credit landscape, which is currently highly collateralized and is resulting in bank credit injustice. The new move is expected to expand credit markets and improve access to credit for farmers, micro and small enterprises as well as cooperatives.
In developing countries like Ethiopia, the poor and the rural population are restricted from accessing credit from formal financial institutions and escape poverty just because they do not own assets such as houses and cars that can be taken as collateral. Abduselam Wariyo, graduate of agricultural science, who works with pastoral population residing in Borena zone, close to Ethio-Kenya border, witness this dusky reality. He usually encounters pastoralist in Borena who possesses plenty of movable assets such as cattle, goats and camels that worth hundred thousand of birr.
“Pastoralist are excluded from credit markets because they do not have an array of productive assets that can be accepted as collateral,” Abduselam tells EBR. “Their dream of transforming themselves and led sedentary life vanishes with it.”
Livestock constitutes 45Pct of Ethiopia’s agricultural sector, which contributes 35Pct to the national economy. In Ethiopia, there are 59.5 million cattle, 30.7 million sheep, 30.2 million goats, and 1.2 million camels, according to the latest report by the Central Statistical Agency (CSA). But these assets have little capacity to transform the portion of the population who are dependent on them.
Banks in Ethiopia require fixed asset 234Pct higher than the credit amount as collateral to provide credit, which is much higher than the 120.8Pct collateral rate in Kenya. This means the banking system is highly collateralized. Currently, only 265,000 people access credit from commercial banks operating in Ethiopia, according to data from the National Bank of Ethiopia (NBE) while 35Pct of the adult population has a bank account and save money at least once annually.
Comparatively, Micro Finance Institutions (MFIs) has better performance in this regard. Currently, MFIs provide loan for 5.5 million people. Yet, the larger section of the population cannot access finance from formal channels. As the result, the financial inclusion rate in the country stood at 35Pct, which is lower than sub-Saharan Africa’s average of 45Pct.
“Relatively, there are many savers but very few are accessing loans from the banking industry. This is financial injustice,” explains Teke Alemu (PhD), lecturer of finance and economics at Addis Ababa University. “MFIs are better when it comes to addressing more loan seekers but it is not enough.”
Temesgen Zeleke, head of the Financial Inclusion Secretariat at the NBE, agrees. “Household level credit is insignificant in Ethiopia. This is deterrent to initiate small businesses and improve the lives of the poor section of the population.”
To expand the credit markets and improve access to credit for farmers, Micro and Small Enterprises as well as cooperatives, the Parliament passed a law that forces financial institutions to accept movable assets as collateral. Moveable property means assets such as livestock, patent, land operating right, agricultural products, household items, machineries, land ownership rights, warehouse receipts, and intellectual property rights, among others.
In order to create security right in movable property and ensure its effectiveness, the proclamation empowers the NBE to introduce the required regulations and directives. To this effect, the NBE introduced a mandatory law that forces all commercial banks to allocate 5Pct of their annual loan disbursement to moveable property collateral credit scheme, effective from July 1, 2020. However, only warehouse receipt is accepted by financial institutions as a collateral., until now.
In order to implement the new law fully, it requires registering, codifying and assigning serial numbers for movable properties. Data center and proper property evaluation mechanisms are also critical, for creditors to access real time information about the property and know its exact price.
“The moveable property collateral credit scheme will bring fundamental change in Ethiopia’s credit landscape,” says Yinager Dessie, governor of NBE. The central bank has already installed a new office dubbed Movable Property Collateral Registry Office and currently building a data center at a cost of ETB40 million, with support from the World Bank. The registration system and credit information bureau will be centralized at national level.
This means, before a pastoralist takes cattle to a bank and ask credit collateralizing his movable property, his cattle will be registered with its own serial number and earmarked. The serial number earmarked on the cattle is kept visible to avoid multiple crediting. Once the farmer takes loan collateralizing the cattle, the banks share interfacing data, so the owner do not go to other bank and take another loan collateralizing the same property.
In contrast, movable property registration in many countries focuses on registering and tracing the owner, rather than the property. But when it is the property that is registered, the owner might not be responsible enough to follow-up and manage the property on behalf of the creditor.
To rectify this, experts advise the government to attach movable property registration with national ID or TIN number. In this way, it is possible to ensure the safety of the property seized as collateral. “There must be a simple way to trace the owner of the property,” explains Temesgen.
The other problem that restricts moveable properties from serving as collateral is the absence of property evaluation and lack of awareness. “The valuation concept in Ethiopia is not scientific, even for the fixed asset, let alone for movable property,” argues Fikru Woldetinsae, financial expert. “The evaluation system in Ethiopia focus on final value. We do not have cost breakdown of the property from the day it was acquired to its value down the line.
Fikru argues the price of the property at one point of time does not necessarily reflect its full value. “Without knowing the price of the property from start to end, it is difficult to determine its true value,” he stress. “The true value of the property is fundamental to determine how much money the credit seeker should take as a loan.”
“We know there is basic problem in property evaluation,” says Temesgen. “The NBE established working group to solve the problem. But it must start somewhere and we have enough data to begin.”
According Temesgen, available data from the Ministry of Agriculture (MoA) and CSA will be used as input for the property evaluation in the agriculture sector. “MoA is also expected to start providing landholding certificates for farmers, which also can be used as collateral to access credit from banks.”
Just like in other countries, property evaluation can be done by private firms, which is also expected to boom in Ethiopia, following the full implementation of the new law. “The proclamation is the fundamental and most significant that can change the rural landscape and strength the private sector. But banks must buckle up to take more risks,” stresses Eyob Tekalign (PhD), state minister for Finance.
Yohannes Ayalew (PhD), president of Development Bank of Ethiopia, stresses the move has even more impact. “It will improve the monetization of the economy by converting properties into liquid assets,” he argues. “The more the economy is monetized, the more money circulates. This in turn, benefit more individuals and the society as a whole.”
For instance, the huge livestock resource existed in the country has not been monetized until now. But once the farmer or pastoralist takes loan collateralizing the livestock, this movable property will be monetized and become active capital in the economy. “This is highly instrumental in terms of boosting transactions, startups, employment and tax revenue,” says Yohannes.EBR
9th Year • Nov 16 – Dec 15 2020 • No. 92