The end of an Era for NGCBs
INTRODUCTION
Access to credit facilities by financially excluded population groups such as women, youth, rural communities, small holder farmers and micro, small and medium enterprises (MSMEs) in developing countries remains a mirage without a functional, accessible, inclusive and efficient system of credit and security. As these population groups contribute significantly to the GDP of any economy, the inability to access credit has constituted serious growth constraint necessitating government intervention through regulatory and enabling environment support.
With a goal of improving financial inclusion and access to affordable debt finance, Zimbabwe’s Movable Property Security Interests Act (Chapter 14:35) was enacted in 2017 to regulate the creation, perfection and realisation of security interests in movable assets. The Act also makes significant changes to the laws of securitising movable property in Zimbabwe such as the Deeds Registries Act; the Bills of Exchange Act; the Grain Marketing Act; the Hire Purchase Act and the Insolvency Act.
This article examines how the Movable Property Security Interests Act ends the existing regime of registering security interests in movable assets, and how the Act deepens financial inclusion in the country.
NOTORIAL GENERAL COVERING BONDS
Prior to the enactment of the Act, lenders who sought security were limited to real security through various types of mortgage bonds over immovable property. Notarial General Covering Bonds (NGCBs) which permitted for the use of movables including book debts, as security for a debt were the main available form of security, even though they afforded insufficient security over the movable assets.
An NGCB is registered over all the movable property of a debtor, but does not entitle the creditor a real right of security in that property. Nothing prevents the debtor from dealing and disposing of the property subject to the NGCB. In other words, the creditor cannot prevent an alienation, sale or pledge of the property subject to the NGCB, he cannot follow the property in the hands of the acquirer and cannot prevent a judicial attachment. The rights of the creditor are of importance mainly upon insolvency. However, even in that instance, a creditor is not secured and is only entitled to a preference over the concurrent creditors with respect to the proceeds of sale of the movable property subject to the NGCB.
What constitutes a Security Interest under the Movable Property Security Interests Act? operation, will change the securitisation laws in Zimbabwe which will necessitate amendments to statutes such as the Insolvency Act. Furthermore, The Act will create a “security interest” which is defined in section 2 of the Act as a property right in a movable asset created by an agreement to secure payment. A security interest is created when a borrower and lender enter into an agreement in terms of which the lender provides a loan to the debtor. The loan is thereafter secured by a movable asset provided by the debtor. In terms of the Act, the security agreement must be in writing and signed by both the debtor and creditor. It must identify both parties and it must describe the secured obligation and the collateral. This is beneficial in that the Act permits such security interests to be registered in the Collateral Registry and thereafter enforceable against all other third parties
The Act creates a “security interest” which is defined as a property right in a movable asset created by an agreement to secure payment. After a borrower and lender enter into a written loan agreement, the loan is secured by a movable asset provided by the borrower. The Act requires that the security agreement be in writing, it must identify both parties, it must describe the secured obligation and the collateral and it must be signed by both parties. Once completed, the Act permits such security interests to be registered in the Collateral Registry and become enforceable against all other third parties.
THE FUNCTION OF THE COLLATERAL REGISTRY
The Act formalises the registration of security interests in a central, public registry known as the Collateral Registry within the Reserve Bank of Zimbabwe. The Collateral Registry is publicly available and constitutes a database of interests in, or ownership of movable assets in the country. From the onset, it is clear that the process of registering security interests in movable assets shifts from the NGCB regime under the Deeds Office, to the Collateral Registry at the Reserve Bank.
A lender who registers a security interest in movable assets is issued with a Registration Notice, which affords the lender preferential creditor status in those assets. A lender can easily ascertain whether a security interest in movable assets is already registered in favour of another creditor prior to accepting that security. The lender is also able to verify whether a security interest has been discharged following payment of a debt or performance of the secured obligation.
FINANCIAL INCLUSION
According to the Reserve Bank, financial inclusion means that individuals and businesses have access to useful and affordable financial products and services for transactions, payments, savings, credit and insurance that meet their needs and are delivered in a responsible and sustainable way. The first Zimbabwe National Financial Inclusion Strategy (2016-2020) identified various financially excluded population groups such as women, youth, rural communities, small holder farmers and MSMEs. Significant efforts were made to narrow the financial exclusion gap which saw financial institutions offering low-cost accounts, increasing their footprint through bank agents, widespread acceptance of digital payment platforms such as mobile applications and USSD, and integration/ interoperability of banking and mobile payment systems. However, there still remained the aspect of access to credit as a hinderance, which in turn had a negative impact on the growth of businesses led by the financially excluded population groups.
For financially excluded groups, the Collateral Registry translates to decreasing the cost of credit, as any movable asset can now be considered as security for loans offered by lenders or financial institutions, at a relatively lower cost than present. Prior to the enactment of the Movable Property Security Interests Act, the legal framework for the creation of security in movable assets lay in the Deeds Registries Act through registration of NGCBs, accessible primarily by big enterprises seeking financing for capital projects. The cost of registering such NGCBs amounted to between 5% and 10% of the value of the loan to be secured. With the ushering in of the Collateral Registry, it is envisaged that the cost of registering a security interest over movable assets will be more administrative and therefore affordable, even if it is on a sliding scale.
Next, the Collateral Registry broadens the type of movable assets that can be considered as security beyond the scope of factory equipment, office furniture, trading stock, company vehicles/ trucks, and company debtors; to include personal motor vehicles, personal household furniture, ICT equipment, livestock, rights to sale proceeds, and intellectual property. These latter types of movable assets are indeed accessible to women, youth, rural communities, small holder farmers and MSMEs.
Finally, process of calling up the security under the Collateral Registry has been curtailed. Previously, in enforcing an NGCB, a creditor would go through lengthy court battles, that do not yield results in the end as the security under the NGCB would have been alienated or disposed of. The Act provides that a notice of registration of a security interest issued under it is a liquid document that is enforceable by provisional sentence proceedings. This means that the security document is prima facie evidence of the loan owed by the borrower to the creditor, and there is no need for trial to establish this. The Act goes further to state that the creditor may seize and take custody of the movable asset that is under the security agreement pending the grant of provisional sentence. This seeks to protect the lender’s rights in the specific movable asset used as security, by allowing the lender to take immediate custody of the movable security. It prevents the dissipation of the movable assets prior to conclusion of court proceedings or public auction, as was the order of the day under NGCBs. These provisions give confidence to lenders that their security interests in movable assets can be called up with ease, and affordably, without the need to go through lengthy, costly trials.
CONCLUSION
It certainly is the end of an era for NGCBs, as the Collateral Registry ushers in an affordable, accessible framework for the registration of security interests in movable assets. What remains are regulations that provide for the modalities of transferring the responsibility of this registration from the Deeds Office to the Reserve Bank Collateral Registry, the format of notices to be registered in the Collateral Registry, and the registration fees.
