Widening Credit Collateral Options for the Masses beyond Land Titles in Uganda

Have you ever missed out on a loan because you did not have a land title to use as collateral? If your answer is yes, your guess is as good as mine, there are many other Ugandans who share your experience. According to the latest findings of the nationwide survey on the demand for financial services (FinScope) funded by Financial Sector Deepening Uganda (FSDU), two (2) in every ten (10) adult Ugandans have a land title.

Have you ever missed out on a loan because you did not have a land title to use as collateral? If your answer is yes, your guess is as good as mine, there aremany other Ugandans who share your experience. According to the latest findings of the nationwide survey on the demand for financial services (FinScope) funded by Financial Sector Deepening Uganda (FSDU), two (2) in every ten (10) adult Ugandans have a land title.

Therefore, most Ugandans would not be eligible for a loan from a commercial bank. They would probably access loans from semi-formal financial institutions such as Savings and Credit Cooperatives Organizations (SACCOs) and informal financial institutions such as Village, Savings and Loans Associations (VSLAs). These semi-formal and informal financial institutions are more flexible as to what collateral they can accept for them to advance a loan. They accept alternative collateral such as animals, farm produce and movable assets like bicycles and furniture. The Chattels securities (secured transactions) law makes it possible for one to use moveable property and securities interests in other assets as collateral to access credit from a regulated financial institution. Chattels in basic terms refers to “someone’s possessions, not including any houses or land that they own” These can be items of movable personal property, such as furniture, domestic animals, etc.

Therefore, this law is very critical in Uganda’s efforts to increase the bank credit access frontier to the masses. It is very common to find an average Ugandan without a land title but with assets such as livestock and farm produce. Thereare many bibanja holders (untitled land) with tracts of land as large as 1 acre or more with thriving farms who cannot access bank credit to expand their production. These are the farmers who supply most of the food consumed in the urban centers and with potential to even export to the neighboring countries. While these farmers may not have land titles to access bank credit, the current andpotential value of their farms might exceed the value of the land by far.

Therefore,an efficient and effective mechanism that can make it possible for thesefarmers to unlock this value to access bank credit is very critical to themodernization of agriculture in Uganda. The most recent findings from theFinScope survey also show that five (5) out of every ten (10) adult Ugandanswho earn less than Ushs 40,000 per month from farming are invested in farmland. Nine (9) out of every ten (10) of these farmers does not have a land title.

There is no better person who demonstrates the value of an efficient and effective chattels securities (secured transactions) framework than Fernando Do Soto. In his book “The Mystery of Capital” Fernando argues that in “Haiti one of the poorest countries in Latin America, the total assets of the poor were more than 150 times than all the foreign investment the country had received sinceits independence from France in 1804 (196years from the time this book was published)“. However, this capital could not be utilized because of the absence of legal frameworks that recognise the value in the different types of assets.

Besides the economic benefits from the Chattels securities (secured transactions) law, this law will also strengthen consumer protection in transactions where the use of chattels as collateral has been abused especially for the vulnerable members of society which in most cases are the poor. Stories are told of how someone borrows say Ushs 100,000 and uses their bicycle valued at say Ushs 300,000. Instead of the lender just holding the ownership documents in custody until the borrower repays the loan, the borrowers have in most cases been required to sign away the full ownership rights to the chattel even before they default on their loan payments. This violets the borrower’s rights because there is no effective legal framework in place on chattel securities.

The chattels law in Uganda dates back tothe colonial era before Uganda attained independence. However, a lot of social and economic developments have taken place since that time which called for there form of the existing chattels law. The first attempt at the reforming the chattels regime were made in 2014 with the enactment of the Chattels Securities Act in 2014. While this new law made some significant changes, there wereseveral issues that were not addressed in line with international best practices.

International best practicesare guided by five key principles: (1) broad scope: concerning types of movable property, forms of debt, and types of interests covered by the regime; (2)simple creation: limiting formalities of creation to keep the process simple and transaction costs low; (3) effective publicity: establishing a system of public access to existing and potential security interests in movable assets; (4) clear rules of priority: comprehensive rules governing priority of competing claims increase lending certainty and increase credit; and (5) quick and effective enforcement mechanisms: to decrease the time and expense of realizing collateral to pay off the debt. 

According to the 2017 Doing Business Report, Uganda ranked 44out of 190 countries on “getting credit”. This ranking is based on a score of 6 out of 12 of the “Getting Credit” indicators. One of the challenges cited in “getting credit” included: the lack of “an integrated or unified legal framework” for chattels securities (secured transactions); limited scope of coverage and the lack of an electronic notice registry of security interests.  

Over the past decade over 80 economies have reformed their legislation governing chattels securities (secured transactions). More recently, reform has been effected in Rwanda, Liberia, Malawi, Gambia, Ghana, Nigeria and Zambia. Additional reform efforts are now in processin Morocco, Tunisia, Lesotho, & Kenya.

Uganda has joined the other progressive African countries to reform its chattels securities (secured transactions) legal and regulatory framework. With support from Financial Sector DeepeningUganda (FSDU), the Uganda Registration and Services Bureau (URSB) is championing the reform process of the chattels securities (secured transactions) legal and regulatory framework. These reforms among other things will introduce a law which provides for a unified chattels securities (secured transactions) legal framework and the establishment of an electronic “notice” registry which is geographically centralized, unified for all types of movable assets and for both incorporated and non-incorporated entities.

Ona closing note, the reform of the chattels securities (secured transactions) legal and regulatory framework adds another step in the journey towards a more inclusive bank credit market where credit isnot a preserve of those who have land titles. This reform will also act as acatalyst for new products for the masses previously excluded from the bank credit market.

By: Joseph Lutwama

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