Fadzayi Mahere | As the economic situation in Zimbabwe continues to decline, the government has had to resort to gymnastic levels of innovation to overcome challenges around productivity, liquidity and access to capital.
Some of the innovations introduced in an attempt to deal with the economic downturn include the introduction of bond notes (the Reserve Bank Governor’s version of fictitious, locally printed money touted as equivalent to the United States dollar), the suggestion by the Minister of Education that school fees be payable in the form of livestock – that is, cattle and goats and new legislation to enable the owners of movable assets including livestock to use such movable assets as security for bank loans.
Traditionally, financial institutions prefer to give loans on the back of immovable security, that is, a home, a commercial property or land. The rationale underlying this traditional approach is that immovable property is more secure than movable property because title deeds formally registered with the Deeds Registry can be presented as proof of ownership of the immovable property. This leaves less room for a dispute as to whether the person who encumbered the property had the legal authority to do so. Additionally, a mortgage bond can be registered in respect of immovable property to prevent the sale of the property before the loan has been fully repaid. It is also impossible for the debtor to run away with an immovable asset. All these factors combine to make immovable property more attractive as security for a loan than movable property.
The Movable Property Security Interests Bill seeks to disrupt the traditional approach to securitising loans by providing for the registration of movable property security interests. In other words, the Bill intends to create a more secure framework for the use of movable property, such as cars, furniture, cattle and goats, as collateral for the repayment of loans.
Why is this Bill being introduced?
According to the Parliament of Zimbabwe website, the Bill is part of government efforts to improve the ‘ease of doing business’ in Zimbabwe. The ‘ease of doing business’ index is an index created by the World Bank Group and according to the Herald of the 15th of December 2015, the Bill was drafted by a World Bank consultant.
The World Bank Report on ‘Doing Business and the Global Secured Transactions and Collateral Registries Program’ revealed that the ‘Doing Business Project’ has influenced over 300 regulatory reforms around the world, by measuring and tracking changes in the regulations applying to domestic companies, including secured transactions. The Doing Business Report 2012 revealed that between June 2010 and June 2011, 21 jurisdictions reformed their secured transaction laws. The goal of the Secured Transactions and Collateral Registries Program is to increase access to credit for businesses, especially small to medium enterprises, by providing technical advice on implementing secured transactions laws and developing collateral registries to facilitate the use of movable assets as collateral.
Most Zimbabweans fail to access credit facilities from lenders due to lack of collateral in the form of immovable assets. It is estimated that more than 80% of Zimbabweans are informally employed and do not have access to credit facilities. The World Bank, being one of the advocates of the Movable Property Security Interests Bill, argues that small to medium enterprises play a pivotal role in economic development. However, they are less likely to secure bank loans due to, inter alia, a weak regulatory framework, limited bank financing and few financing alternatives for start-ups. The World Bank notes that about 50% of formal small to medium enterprises do not have access to formal credit facilities. According to the argument, this calls for the introduction of innovative ways to unlock much needed capital. The proposed Bill therefore, seeks to create an enabling environment whereby small to medium enterprises and the general public would be able to use their movable assets to secure loans.
Zambia and other jurisdictions in Africa and other parts of the world appear to have adopted this approach already and for the same reasons argued for by the World Bank.
Is the use of movable property as collateral for loans a new idea?
As a matter of law, the use of movable property as special security for the payment of a debt or generally the performance of an obligation is not new. For example, the law recognizes that a pledge can constitute special security over movable property. Equally, a notarial bond provides a means by which a debtor may hypothecate movable property without delivering it to the creditor in whose favour the bond is passed. Hire purchase agreements rest under similar principles.
It is therefore not disputed that the law can and should enable movable assets to be used as collateral to secure a loan agreement.
However, the legislative device that has been invoked through the expedient of the Bill in question is not without problems and the outcomes hoped to be achieved may not be realized if the Bill is enacted without amendment.
Will this new law mean cattle and goats may be used as collateral to secure bank loans?
In a recent address to Parliament, Mr Patrick Chinamasa, the Minister of Finance, said the Movable Property Security Interest Bill would make it much easier for those with movable assets, such as livestock to get bank loans. This led to a flurry of newspaper headlines about how Zimbabwe plans to secure bank loans with cows. This interpretation is accurate in view of the fact that clause 2 of the Bill defines “movable property” as “any tangible or intangible property other than immovable property”. Livestock including cattle and goats would fall within the ambit of this definition.
The suggestion around references to livestock centres around the idea that farmers, especially rural farmers and beneficiaries of the land reform program in Zimbabwe will finally be able to obtain loans by using their livestock as collateral. One of the leading explanations that is given for the lack of productivity on Zimbabwe’s farms is the lack of access to capital for farmers.
What is the solution to the “collateral problem” farmers face?
According to clause 4 of the Bill, a new department known as the Collateral Registry will be created by the new law. Clause 5(1) of the Bill states that the purpose of the Registry is “to facilitate commerce, industry and other socio-economic activities by enabling individuals and businesses to utilise their movable property as collateral for credit”.
The difficulties that many a new farmer has experienced in raising capital are well documented. However, if the government were genuine about empowering the rural farmer, it would start by giving the rural farmer or tiller of agricultural land security of tenure. According to section 72(2) of the Constitution of Zimbabwe, which is the supreme law of the land, all agricultural land vests in the State. This means that no farmer in Zimbabwe holds title to his land. It follows that no farmer in Zimbabwe can use his land as collateral to secure a loan.
With all due respect, the government cannot approbate and reprobate – claim to be empowering small business, particularly farmers, by introducing laws that expand the notion of real security and in the same breath continue to deprive farmers of the most potent form of real security – title to land. Land tenure in the agricultural sector has worked before. Why not revert to a winning formula? This is what I would have expected the World Bank consultant to be devoting his or her energies to. The re-awakening of the Zimbabwean economy is not a matter of ticking boxes or applying without thought or amendment a notion that has been applied in other jurisdictions. It is a matter of addressing the fundamental cause of the problem, with appropriate regard to the context of the nation where the problem exists.
It begs no mention that Zimbabwe requires a productive and thriving agricultural sector in order for the economy to function profitably and sustainably. Once the agricultural sector kicks into motion, industry will re-awaken. Jobs will be created. The import bill will be drastically reduced. The country will have goods to export which will in turn create foreign currency earnings for the country. Infrastructure, including roads, dams and bridges will be built to support the agricultural sector and our fortunes will be in a better position to improve.
Therefore, if any commodity is crying out to be turned into collateral – it is agricultural land. Once land tenure is created for agricultural land, not only will such land be available for use as collateral for bank loans but it will mean the holders of such land will be more secure. As things stand, most of the farmers in possession of agricultural land hold such land on the strength of an offer letter – the clear terms of which are that the State can withdraw such land at any time and for any reason the State deems fit. most farmers would not have the financial muscle or wherewithal to challenge the withdrawal of their right to use the land. They therefore are left fully exposed and have very weak property rights in respect of the land they utilise. It is irrational to suggest that a farmer who tills agricultural land should be placed in a position where he or she gives up his or her livestock as collateral to obtain a loan for farming purposes in circumstances where the land can be withdrawn at any time by the government. The farmer would be left completely exposed if he has used his livestock as security to obtain money to put a crop in the ground then the land is forcibly acquired for re-allocation as tends to happen. Both the land and the livestock would be lost! It would make more sense to use the land primarily as security. (At the very least, add movable property security interests legislation to a framework that has fully exhausted the potential for the full use of immovable property as security. Immovable land is better suited to this purpose as highlighted above.) Such respect for property rights in the true and full sense would no doubt improve the ease of doing business in Zimbabwe.
It is always preferable to solve problems at their root than to proffer piecemeal solutions that only paper over the symptoms and ignore fundamentals that are in hopeless disarray.
How accessible is the process for a small business, ordinary farmer or lay individual?
For a process that is designed to cater to the needs of a low-income market, the process for registering a security interest in an item of movable property is extremely complicated and the legislation is not cast in a user friendly manner – as would have been expected for a market that is unlikely to have access to formal legal representation to assist in the securitisation process. To illustrate the point, a “registered notice” is defined as “a notice of a security interest registered in the Registry, and includes an electronic communication to the Registry of information in an initial registered notice, an amendment notice or a cancellation notice.” How is a rural farmer or the owner of a small business meant to interpret this definition?
After much convoluted language, clause 9 provides that a registered notice shall be deemed to be the definitive record of any record or obligation recorded therein – and presumably, on an application of clause 9(2), a certificate confirming the contents of a registered notice can be issued as proof of the contents of the registration notice. The Bill does nothing to provide for what this “certificate” is or how it is issued. Clause 11, the section that deals with regulations similarly is silent on this issue.
After reading the Bill, one is left with more questions than answers on how the system is to work in practice. There is a need to (i) simplify the process and (ii) simplify the language of the legislation of the desired outcomes – i.e. creating a user friendly framework for small business to use their movable assets is to be achieved.
Is there adequate protection for the debtor?
Clause 8 of the Bill allows the loan agreement to make a provision for a creditor to seize the movable assets from a debtor before the finalization of court proceedings. This places the debtor in an extremely weak position as a creditor can descend on the property with no notice and before the rights of the parties have been finally determined. The potential for disaster ought to be immediately clear in the event that the movable property concerned is livestock which requires strict methods of transportation, storage and upkeep to be observed.
While it is understood that the interests of a creditor must be secured, the Bill as it stands creates the potential for unfair contractual terms to be imposed on a small business or lay person who does not have the bargaining power to protect his or interests. This would undermine the essence of the legislation which is to empower small businesses to unlock capital. the unlocking of capital must not come with inadequate legal protection against the loss of the collateral asset.
Is there adequate protection for the creditor?
In addition to the traditional reasons attaching to the undesirability of accepting movable assets as collateral, it must be highlighted that the Bill does not do enough to ensure loans given by a creditor are secure. There is no mechanism in place to ensure that a person who registers a notice on movable property in their name is in fact the owner of the property. This could lead to disputes around ownership pursuant to a registration. The Bill does not state how such a dispute would be resolved. Clause 10 of also Bill exempts the Reserve Bank and the Collateral Registry from liability in the event that a mistake is made. This could have disastrous consequences in the event that a lender acts on erroneous information provided by the system, albeit bona fide. The said lender would be left with no recourse at law – a factor that could militate against lenders having confidence in the system. The Bill ought to provide stronger safety nets in this regard.
There must also be stronger safeguards against the potential for corrupt practices as trust will be paramount to ensure the system works.
Who holds the movable property during the subsistence of the loan?
The Bill appears to be silent on the question of who possesses the secured property during the period that the loan agreement is in operation. Clause 21(1) of the Bill seems to suggest that it can be either the debtor or the creditor – presumably depending on the agreement between the parties. It is my respectful view that insufficient thought has been devoted to the modalities of the possession of the secured movables pending repayment of the loan. This anomaly has the potential to leave both parties exposed. If the collateral were an immovable property, this question is answered by the fact that the debtor can continue to hold the property and because it is fixed, this is not risky. In the case of movables, there is a real risk and possibility that the holder of the movable property can disappear with it or consume it – leaving the creditor exposed. Criminal sanction is not a sufficient answer to this concern to a lender who simply wants their money back. Equally, if the creditor is to hold the property, the question becomes – where is it stored? How can the property be retained in good order?
All that the Bill says in answer to the above at clause 21(1) is that “A debtor or secured creditor in possession of the collateral must exercise reasonable care to preserve the asset.” The question that arises is, what is “reasonable care”? In the event that the movable asset is livestock – what happens if the animals are infected by disease or are ravaged by drought despite the possessor’s best efforts? A possible solution may be to insure the movable property – but, how likely is a small business to be able to afford the cost of such insurance and the all the fees required to be paid at each stage of the process? This state of affairs will be compounded by the weak bargaining power a small business or individual farmer will have in the contract-making process. More protection is required to secure the position of a small-time borrower.
In conclusion, celebration around the measures sought to be introduced must be accompanied with caution as it will not just be a case of owning a car or cows and consequently being entitled to bank loans. Despite what has been reported in the media, the Bill does not compel any banking institution, micro-financier or other lender to accept movable assets as collateral – such a provision would be unconstitutional in any event. The decision as to whether to accept movable assets as collateral will remain with the bank or lender concerned pursuant to a full risk assessment and depending on the availability of funds for this purpose. All the law can do is create a framework that encourages the acceptance of movable property as security, primarily through enabling the registration of the secured interest. Additionally, the law places a borrower in a very weak position – which could lead to more loss than gain. While reform in the law is a good thing, there can be no substitute for reforms that deal with the fundamental problems as opposed to reforms that paper over the cracks. At the heart of any recovery process in Zimbabwe lies the need to address the big elephant in the room which is the need for more secure protection for property rights. Without reform in this area, we will continue to reel under superficial high sounding policies that ultimately do not lead to a sustainable change in the country’s fortunes – no matter how well-intended.
(C) Adv Fadzayi Mahere. Mahere is a constitutional lawyer who practises at the Harare Bar and lectures Property Law and Administrative Law at the University of Zimbabwe.