Op-Ed: The World Bank backed law of security rights in movable assets in Ethiopia has flaws that need to be addressed urgently

By Asress Adimi Gikay @RealAsressGikay

Addis Abeba, June 9, 2021 – The Ethiopian Parliament enacted a modern law governing security rights in movable assets in 2019. The Movable Property Security Rights Proclamation was drafted with the assistance of the International Finance Corporation (IFC). Enacted in response to the dire need of the Ethiopian financial sector as well as small and medium-sized enterprise for a comprehensive law governing collateralization of movable assets that is pivotal to enhancing access to credit, the law permits borrowers to use many types of assets including vehicles, agricultural goods such as crops, equipment, and incorporeal assets such as intellectual property rights and accounts receivables as collateral.

The new legal framework also mandates the establishment of a Collateral Registry Office in charge of registering all security rights in movable assets, filed exclusively online. Undoubtedly, the new legal framework would give businesses and consumers a better opportunity to access credit at a low cost by granting security rights to creditors in a broad range of movable assets, in contrast with the previous  obsolete legal regime that had unclear provisions regarding many types of security rights. It also creates a single collateral registry system and efficient enforcement rules. But this law also has certain shortcomings that may cause practical challenges, and in some cases with grave socio-economic consequences. The law is based on Article 9 of the Uniform Commercial Code of the United States and has certain components whose compatibility with the Ethiopian current socio-economic context is questionable, even by the standard of the US law itself. The drafting process also lacked transparency to the broader stakeholders, including advocacy groups, scholars, and the public at large. 

The transparency deficit

When the law governing security rights was being drafted, there was a fair amount of opaqueness that prevented sufficient scrutiny of the draft by the broader Ethiopian stakeholders. A letter soliciting comments, to which the bill was annexed, sent out by the Ethiopian National Bank on November 17, 2017, was addressed to the Ethiopian Bankers Association, Ethiopian Lawyers Association, and the Association of Ethiopian Microfinance Institutions. Other stakeholders, albeit not explicitly excluded, were officially unaware of the draft law and its impact on them, or the interest groups they represent. 

This area of law has been in place since 1960 when the Ethiopian Civil Code and Commercial Code were enacted primarily based on French legal tradition. Given the novel approach adopted by the new law and its potential implications for consumer debtors and the society at large, the National Bank as well as the IFC, should have set up a public consultation and feedback system, rather than to allow a small group of consultants and lawyers to determine the suitability of a law that would affect millions of citizens. Public consultation during law making process is conducted on all legislative proposals in other jurisdictions such as the European Union and the United Kingdom because citizens and other stakeholders who would be directly impacted by the law have equally high stake as the expert drafters or other elite groups and should be given the opportunity to contribute to shaping the  policy behind the law. The Organization for Economic Cooperation and Development recommends the lawmaking process to be based on public consultation, among others, to ensure legitimacy and credibility of the process, to promote legislative literacy and  compliance as well as to ensure that the law takes into account public interest. 

Unfortunately, this core principle in the legislative process has been flouted by those involved in drafting the law of security rights in Ethiopia. Based on the circumstances surrounding the process, it was unclear whether this opaqueness was advised by the IFC, or the individual consultants involved in the process.  To be clear, all stakeholders involved in the process should share the responsibility. The IFC being the investment wing of the World Bank, has its own interest which does not align with the interest of the broader Ethiopian stakeholders such as small businesses, farmers, and consumers, which might partly explain why the draft law was not subjected to adequate public scrutiny. Both as reform advocate and an investor in diverse sectors and a potential creditor, the IFC would undoubtedly want to promote creditor-friendly laws, apparent in some of the proclamation’s harsh rules of enforcement of security rights with in no legal remedies for debtor’s subjected to abuse by creditors. Thus, the strictly managed and partially transparent legal reform process could have been dictated by the need to preserve the self-interest of the IFC, by protecting the problematic legal provisions that it aggressively advocates for from criticism and potential revision. 

Driven by my research interest in the field and having multiple publications covering reform in this area, I emailed the lead consultant Dr. Marek Dubovec on January 25, 2018, requesting the draft proclamation. A day later, he informed me he was not at liberty to share the draft law with me, although we were acquaintances that have been on good terms. In his response, he stated, “It is the prerogative of the drafting group to decide how and with whom to share the draft Proclamation. I am not at liberty to circulate the draft Proclamation.” This was shocking to me given the fact that a draft law which is closer to being enacted by the parliament of the country and being already circulated for feedback should be available to any interested citizen. Two years after the law was enacted, I published the first comprehensive book covering the law where I demonstrate that several important provisions of the law are simply not fit for Ethiopia; in some cases obsoletes concepts copied from US Law while in others, legal rules that are proven not to function even in the US being imported without further thought . Unfortunately, the opaque process of legal drafting and deliberation has allowed the many problematic provisions to be enacted without the essential scrutiny and revision. 

Technological challenge

The new law mandates the establishment of an exclusive electronic collateral registry in a country that suffers from insufficient electricity and internet access. The National Bank now runs the electronic collateral registration system and there is no adequate data to evaluate its accessibility to the broader stakeholder. But according to World Bank data, in 2018, less than 50% of the total population of Ethiopia has access to electricity while less than 22 Million People will use the internet in 2020. The infrastructure necessary for the proper functioning of the electronic collateral registry is not present in Ethiopia today. Even in the United States, a country whose law the proclamation is modeled on; some states including New York still administer paper-based registration parallel with electronic registration. Essentially, this law, which assumes that Ethiopia is technologically more advanced than New York, would not be fully functional for the Ethiopian farmers or rural dwellers, the great majority of whom are either poorly literate or have no access to electricity and the internet. This defeats the overall purpose of the new law, which is to allow all Ethiopians to have access to finance through using their movable assets as collateral and to have a registration system that works for all. 

Since the National Bank’s Collateral Registry Establishment Directive does not cover paper-based registration system and in the absence any other legislation that is not repealed by the new law, it is impossible to understand what the government thinks about registration of collateral in rural Ethiopia where access to the Central Collateral Registry is impossible.   

Threat to Due Process of Law

The new law potentially deprives citizens of due process of law. It allows the secured creditor (e.g., a bank) to take possession of the collateral (upon the debtor’s default). This procedure known as self-help repossession, pioneered in the US, is largely unfamiliar in Ethiopia. But even the Americans subject it to strict ex post facto court supervision with many rules protecting consumer debtors including the requirement of repossessing the property peacefully, and the harsh criminal and civil penalties for breaching the peace. In the State of Louisiana which has similar legal tradition as Ethiopia, the procedure is strictly regulated to ensure that public peace is observed by the creditor when taking the collateral from the debtor. More precisely, in Louisiana, the procedure is allowed only if the collateral is a Motor Vehicle, and the creditor gives an advance notice to the debtor that states, “Louisiana law permits repossession of motor vehicles upon default without further notice or judicial process.” Nevertheless, the creditor must conduct the repossession peacefully in all cases. 

Under Ethiopian law, the creditor can take possession of the collateral upon the debtor’s default without giving advance notice as far as the debtor has signed an agreement at the time of securing the loan. A repossession clause in the loan agreement that might not have been presented to the consumer in clear and comprehensible manner can subject the consumer to such a harsh private system of justice. Even if there is no prior agreement, the creditor can try to take the property, and if the debtor does not protest, the process can be conducted. The law also empowers the Collateral Registry Office to order the police to assist the creditor in repossessing the collateral. There is no legal avenue for the debtor to challenge any misconduct that may occur during the process. If, for instance, the debtor thinks that they have not defaulted, there is nothing they can do; once they have signed the repossession agreement when they obtained the loan.  

In the United States, despite the high threshold for conducting collateral repossession, the occurrence of confrontation between repo men (person’s repossessing the collateral) and debtors ending in tragic deaths or serious bodily injuries is common. Sometimes the repo men shoot the property owners dead. Other times, the property owners take the repo men’s lives first. These kinds of incidents may not be likely to occur in Ethiopia due to the inaccessibility of firearms among the Ethiopian people. But possible violent conflicts of various degrees between debtors or family members of debtors’ and the repossession agent/the police would be inevitable. Besides this, the law confers a judicial power upon the Collateral Registry Office which can compel the debtor to transfer the property to the creditor, even if there might be a controversy regarding default and payment. This may arbitrarily deprive consumers of their property right and the right to due process of law.

In a country with low literacy level, low respect for rule of law, a high tendency for abuse of power, and police violence, the fact that this proclamation creates a collateral registry office with the power to order the police to execute decisions not passed by courts should be concerning to all Ethiopians. 

An all-inclusive revision process

A country that has limited resources should strive to implement important legal frameworks with careful thought involving in-depth legislative research and wider public participation, rather than rushing a bill that is barely scrutinized by the public through the floor of the Parliament, only to end up engaging in premature revision. The law governing security rights in movable assets has a plethora of substantive issues that require urgent legislative attention, besides its failure to take into consideration the interests of consumer debtors that require protective legal rules. The Ethiopian government has timely and rightly recognized this area of law as vital to enhancing economic development.  Now it is time to recognize that this law has been drafted and passed in dubious circumstances and lacked the required level of transparency which led to provisions that are inapt to the Ethiopian socio-economic context being enacted by the parliament. The government should recognize this and support a revision process owned not just by the elites but by the wider public. AS

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Editor’s Note: Asress Adimi Gikay (PhD) is a Lecturer at Brunel Law School in London. He can be reached at @RealAsressGikay