Secured lending refers to credit transactions where a creditor holds an interest in a debtor’s movable property such as inventory, account receivables, livestock, equipment, and machinery, as collateral to secure a loan or a debt obligation. The interest in movable property is accordingly referred to as security interest, pledge or charge.
Collateral registries are publicly available databases of interests in or ownership of assets, allowing borrowers to prove their creditworthiness and potential lenders to assess their ranking priority in potential claims against particular collateral.
Small firms and consumers are typically unable to utilize most of their movable assets as collateral due to deficiencies in the legal framework. In the absence of an entity that files notices of security interests in movable properties and determines priority in a borrower’s collateral, lenders find it risky to accept movable property as collateral. Reliable collateral registries or pledge systems can thus not only lower the risk of loan defaults but also reduce the cost of transactions by increasing transparency.
Clear secured lending laws that allow the use of moveable collateral can therefore significantly increase the level of credit as it enables small entrepreneurs to leverage their movable assets to obtain credit. Using moveable collateral, further allows for a more efficient risk management as it leads to a better diversification of assets held by financial institutions. It also improves the competition in the financial sector, by enabling both banks and non-bank financial institutions to offer secured loans. Using moveable collateral additionally creates more space for the securitization of loan portfolios in the secondary markets and enhances the ability of regulators to analyze portfolio risks.
Many African markets have devoted most of their attention to the use of land and buildings as collateral to secure loans, while the use of movable assets as collateral is still in its nascent stages of development.