Movable assets as collateral to boost financial inclusion
The government is set to pass the Secured Transactions (Movable Property) Bill 2023, allowing moveable assets such as vehicles, machinery, furniture, electronic appliances, software, agricultural products etc to be used as collateral for loans – which experts say will increase financial accessibility for a broader range of people.
However, they have emphasised the importance of clearly outlining the loan approval process and the valuation of movable assets in the bill to prevent any irregularities.
They say banks have traditionally extended loans against movable assets, treating them as collateral. The new bill will establish a legal framework to formalise and regulate this existing practice.
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The bill was placed in parliament on 20 June and it was sent to the respective committee for further examination.
If enacted, the new law will bring a broader definition of collateral for bank loans.
As a result, movable properties such as gold, silver, and intellectual ones can be treated as collateral for loans from banks and financial institutions.
However, the movable property must be registered for a mortgage. For this purpose, it has been decided to have a separate entity to register movable assets for proper valuation of those.
There should be a clear guideline on how to determine the value of movable property in the policy.
"There is a significant population that lacks land or immovable property, such as houses, to offer as collateral. By enabling loans to be secured against movable property, new pathways for financial inclusion can be established," says Zahid Hussain, former lead economist of the World Bank's Dhaka office.
There should be a clear guideline on how to determine the value of movable property in the policy, he says while talking to The Business Standard.
Ahsan H Mansur, director of the Policy Research Institute, highlights the issue of fraudulent practices leading to artificial inflation of property prices in loan disbursements. The concern extends to the realm of movable property as well, he says.
"Consequently, if an opportunity is created to secure a loan by depositing movable property, the possibility of fraud cannot be overlooked. However, by introducing transparency measures, loans can be granted based on movable assets as collateral," he tells TBS.
If an opportunity is created to secure a loan by depositing movable property, the possibility of fraud cannot be overlooked.
Banking officials say the new bill will have a positive impact on the sector.
Bank Asia's former managing director Arfan Ali says banks have long been accepting movable assets as collateral.
"In particular, there is a practice in banks at present for giving loans by considering the stock of various products, field crops etc as mortgage. So, the new law will be good for both the bank and the customer. If the new bill is passed, a legal basis will be established for banks to accept movable assets as collateral," he tells TBS.
The crucial factors lie in the appraisal of the property and the process of loan disbursement.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, says, "It is not uncommon for loans to be granted by pledging movable assets in many countries. However, the crucial factors lie in the appraisal of the property and the process of loan disbursement."
What's in the bill?
As per the Secured Transactions (Movable Property) Bill 2023, movable property with collateral value includes – raw materials for manufacturing goods for export purposes, gold, silver and other precious metals, share certificates of registered companies, intellectual property products, fish, livestock, trees and crops, furniture, electronics products, software and apps, vehicles etc.
The bill further mentions that financial institutions, insurers, microcredit institutions, money lenders, and other institutions and individuals authorised by laws concerned will be eligible to obtain loans with movable property as collateral.
The bill says the government will establish a registration authority responsible for managing an electronic database concerning the financing and registration of details related to movable property used as collateral.
Finance Minister AHM Mustafa Kamal, while presenting the bill in parliament, highlighted that its purpose is to streamline the process of granting and acquiring loans by utilising movable property as collateral. Additionally, the bill aims to ensure the protection of lenders and borrowers throughout the transaction process.
Practice in other countries
Several South Asian countries, including Bhutan, Sri Lanka, and Pakistan, have begun to recognise movable assets as viable collateral for loans. Similarly, developed Asian nations like South Korea, as well as African countries such as Nigeria, Kenya, Malawi, Liberia, and Zimbabwe, have also embraced the use of movable assets as loan collateral.
In most of these countries, movable assets are primarily utilised for Cottage, Micro, Small, and Medium Enterprise (CMSME) loans and generally not considered for larger loan amounts.
Additionally, these countries have implemented a system where movable assets are registered with a designated authority, which determines their market value.
In Pakistan, the Securities and Exchange Commission established an electronic registry system in 2020, aiming to promote the acceptance of movable assets as collateral for loans by the country's banks, microfinance institutions, and leasing companies.
Similarly, in 2009, Sri Lanka introduced the Secured Transactions Act to facilitate the utilisation of movable collateral. The country also implemented a movable assets registration system, leading to enhanced credit availability and reduced costs.
According to a World Bank report published in 2016, African country Malawi's online collateral registry system facilitated increased access to business loans and allowed financial institutions to register moveable property and mitigate the risk of customers.
Meanwhile, the Asian Development Bank said the series of policies to promote asset-based lending against movable assets since 2018 have been meaningful in terms of strengthening the rights of creditors and expanding the discretion in using movable assets as collateral.
