Uganda is working on a registry of moveable collateral to enable micro, small and medium enterprises to borrow from the formal banking sector.
According to Uganda Registration Services Bureau (URSB) Registrar General Bemanya Tumwebaze, the agency wants the registry in place before the end of 2016.
After enactment of the Chattels Securities Act last year, the government directed URSB to establish a registry for moveable properties like cars, simple machinery, crops, animals, stock in trade and money owned by a company as collateral.
According to Justice Geoffrey Kiryabwire of the Commercial Division of the High Court, failure by banks to take moveable property as collateral has left Ugandans at the mercy of informal lenders, who are unregulated.
The law requires that money lenders obtain a licence from a magistrate.
Apparently, lenders just act as intermediaries, acquiring loans from commercial banks at lower interest rates, which they use as capital to lend, at exorbitant interest rates, to borrowers who lack fixed collateral and hence cannot access loans from banks.
Mr Tumwebaze said the government hopes the moveable property or chattels registry will benefit Uganda’s micro small and medium-sized enterprises (MSMEs), which have difficulty in accessing finance from the formal sector, even though they contribute the most to Uganda’s gross domestic product.
Sub-Saharan Africa trade and competitiveness manager at the International Finance Corporation Carolyn Nshemereirwe-Ndawula said despite a reported increase in loan applications and approvals from Bank of Uganda (BoU), a 2013 World Bank Enterprise Survey reveals that 12 per cent of Ugandan firms identify access to credit as a major concern and an obstacle to growth.
The BoU financial stability report shows that total lending grew by 19.7 per cent from Ush8.8 trillion ($2.7 billion) in the financial year ending June 2014 to Ush10.5 trillion ($3.2 billion) in June 2015.
Despite this increase, only a small percentage of MSMEs access financing from the banking sector.
“Only 9.7 per cent of firms surveyed in the World Bank Enterprise Survey reported having a loan or line of credit from a commercial bank,” Ms Nshemereirwe-Ndawula said, adding that this is because banks prefer fixed property as collateral.
The World Bank survey shows that 73 per cent of all loans given out by banks in Uganda are backed by fixed property collateral compared with 27 per cent backed by moveable property. Over 44 per cent of the capital stocks of MSMEs are moveables, while 22 per cent are the fixed assets and 34 per cent account receivables.
MSMEs find themselves in trouble because of a mismatch between the assets they own and the collateral required for such entities to embark on growth plans.
According to the World Bank, MSMEs contribute 75 per cent of Uganda’s GDP and employ 2.5 million people.
Peninnah Kasule, the company secretary of Centenary Bank said it has been difficult for banks to use movable property as collateral to give MSMEs loans, “because these entities change addresses all the time, making tracking of borrowers difficult and exposing banks to losses.”
Ms Kasule added that the need for continuous monitoring also increases the cost of lending, as a loans officer allocated to clients who have moveable collateral has to keep moving to the physical location.
Bank of Uganda officials said the chattel registry will work like credit reference bureau, so that registered moveable properties are recorded together with biometric identity card system to ease the tracking of borrowers, who will be charged a fee that is yet to be determined.
Like the CRB, the system will also ensure that a borrower does not use moveable collateral multiple times.
According to Ms Kasule, this was a major problem in the past, and in cases of default, it proved difficult for lenders to decide who had the right over collateral that had been used to acquire loans from different banks.