Infrastructure, Capacity Gaps Stall NBE’s Movable Collateral Program

A novel initiative seeking to enable low-incomers to access bank loans using movable collateral, such as livestock, remains stuck in its pilot phase owing to shortcomings in know-how and infrastructure, central bank regulators told Parliament this week.

The central bank introduced legal frameworks intended to enable the use of movable collateral more than five years ago, aiming to improve access to credit especially for farming households, but the program has been unable to get off the ground due to a range of problems.

“Deficit in knowledge, market and infrastructure are the reasons for the delay. For instance, a bank has provided a loan to a farmer taking registered livestock like donkeys or horses as collateral. Then, the borrower fails to repay the loan and the bank forecloses on the livestock. Where would the bank keep the livestock until sale? Financial institutions do not have spaces to keep collateralized livestock. There is no infrastructure in place. Neither is there an online system or marketplace for the banks to sell the livestock directly without the need to warehouse them,” Solomon Desta, vice governor for financial institutions at the National Bank of Ethiopia (NBE), told lawmakers.

Conflict and security issues have also contributed to the challenges delaying the program.

Despite this, the NBE has urged financial institutions to begin implementing the program in earnest this year, in partnership with the central bank, ministries of Trade and Agriculture, the Ethiopian Commodity Exchange (ECX), regional administrations, and development partners.

So far, over 285,000 pieces of movable collateral have been registered in the central bank’s repository, according to regulators.

The registration process ensures a specific count of each piece of property to ensure that borrowers do not use the same item as collateral more than once. The process also helps keep credit track records.

The pilot phase of the program saw clients access credit by collateralizing a total of 2,700 heads of livestock, more than 7,000 land use rights, and nearly 600 warehouse receipts, among others.

The National Agricultural Finance Implementation Roadmap (NAFIR) introduced recently by the NBE and Ministry of Agriculture targets 881 billion Birr in annual loans to the agriculture sector by 2030.

“We have told banks to start implementing the movable property collateral starting this year,” said Solomon.

However, experts argue the NBE should lift the 24 percent cap imposed on banks’ annual credit growth rate before pressuring them to commit to the program.

During the session, Parliament also asked regulators about the effects of the forex market liberalization and wider economic reforms on the banking industry.

“The cumulative profit of all banks stood at 91 billion Birr, which is six times higher. So we cannot say the floating [negatively] affected banks, but benefited them. Banks that have forex-denominated payables might have been affected. These banks were approving a lot of LCs for importers, so they had more payables on their hands. After the floating, they have to pay more in local currency,” explained Solomon.