NA approves legal amendments to increase SMEs financing

KARACHI: The National Assembly has passed a legal amendment to increase access of small and medium enterprises (SMEs) to loans and make transactions secured for financial institutions.

The National Assembly passed the Financial Institutions (Secured Transactions) (Amendment) Bill, 2020 to bring the legal framework of secured transactions in line with the international best practices and improve the country’s ranking on World Bank Ease of Doing Business Index, according to a document. The bill will now be tabled at the upper house for its final approval.

This will provide a legal framework for creation, perfection and enforcement of security interest on movable assets with a view to enhance SMEs access to finance through use of their movable assets – receivables, intellectual property, inventory, negotiable instruments,

agricultural produce, petroleum or minerals, motor vehicles – as security for loans.

With around 40 percent share in GDP, SMEs have access to less than 10 percent of private sector credit, according to the central bank’s data. The country ranks 119 on the World Bank’s indicator of ‘getting the credit’.

The law also provided for establishment of a secured transaction registry (STR) for registration of charges created by unincorporated entities – individuals, sole proprietorships, partnerships – on their movable assets. SECP launched STR in April last

The scope of the law was extended to allow extension of security interests to future assets, products and replacements of original assets and absolute assignment of receivable.

It allows general description of debts and obligations in collateral agreements, permitts that all types of debts and obligations could be secured between parties and allows absolute priority to secured creditors over government and labor claims, in case of default in insolvency or outside insolvency.

“To ensure efficient administration of the STR by the SECP, some powers of the federal government – appointment of the registrar, operationalization of the

registry and ancillary matters have been assigned to the SECP,” said the document.

“This structure of the registry will help to move towards unification of registries and their legal framework in line with doing business methodology and international best practices leading to further improvement in ease of doing business ranking in future.”

Moreover, the security interests will be regulated on the basis of their function, not their form, traditional terminology for security interests to comply with international best practices on secured transactions laws and World Bank’s requirements.

Under the law, filing of security agreement is not required and advance registration of security interest based on authorization by the entity is allowed. A charge/security interest may be registered for a period of up to 5 years, which is extendable, if required.

Perfection of security interests may be achieved by registration in all types of security interests on movable property. However, in some cases e.g. possession of tangible movable property or right on funds credited in deposit account perfection may also be achieved through possession or control respectively. Earlier perfection by registration was not available for all types of security interests.