Article by: Pamela Bubb, Partner and Head of the Commercial Practice, and Brendan Miller, consultant, Webber Newdigate.
According to the Central Bank of Lesotho’s (the “CBL”), list of licensed financial institutions for the 2nd quarter of 2021, there were roughly one hundred (100) financial institutions (commercial banks and micro-finance institutions) licensed to provide various credit services to the Lesotho public. In 2019 the micro-finance sector had an asset base of M982.8 million in comparison to only M797 million the previous year.[1]
Due to the nature of the credit industry, especially amongst micro-finance licensees, the cost of credit for consumers is high. This is partially attributable to the uncollateralized nature of the credit products or the costs and administrative burden involved with securing an interest in the collateral provided under a loan agreement.
A factor which contributes to the cost and administrative burden of securing a security interest is that, in order to secure a security interest in the movable property of a debtor, the security interest must be “perfected”.
A security interest is usually, depending on the type of security interest (lien, pledge, hypothec or notarial bond), perfected by the holder of the security interest taking and holding possession of the movable property. Only once the security interest is perfected will it be enforceable against third parties, including other creditors.
To address this issue, the Security Interest in Movable Property Act, 2020, (“SIMPA”) was promulgated and commenced on the 6th of August 2021. SIMPA makes it possible for a security interest to be registered in the security registry established by SIMPA.
SIMPA will be instrumental in the prioritisation of competing interests in movable property. Credit providers will be able to make a more informed decision when considering granting credit. SIMPA will also prioritise the ranking of competing claims of different creditors against the same security interest.
A security interest for the purpose of SIMPA is “right in collateral that secures performance of one or more obligations”. A security interest is created by a security agreement which is a written contract signed by the security holder, the debtor and/or the debtor’s surety.
The registration of a security interest at the security registry has the effect of publicising an existing interest and perfecting the right to the movable property without the credit provider needing to take any further action, such as taking possession of the movable property, to make the security interest enforceable against third parties. The security bond holder will have a preferent claim ranking above other creditors’ claims if the security interest has been registered in the security registry.
Therefore, SIMPA creates an opportunity for credit providers to protect their interest in movable property against third parties, without having to first take possession of the movable property, in situations where taking possession is impractical or undesirable.
An additional benefit created by SIMPA is that the security holder will be able to take possession or control of collateral and dispose of it without legal process if:
- the security agreement so provides; or
- if the debtor has agreed, in writing, after default, and such possession or control can be taken without a breach of the peace.
thus expediting the execution process.
The security registry may bring with it new opportunities for credit providers and the credit industry as a whole, provided that the license issued to the credit provider by the CBL permits the credit provider to engage in collateralised lending.
For further information and advice on how SIMPA could benefit your company, as well as assistance from our corporate department in registering security interests on the security Registry, contact us here.
[1] Central Bank of Lesotho. 2019 Supervision Department Annual Report.
