La Formación en el Trabajo

The Co-operative Bank of Kenya uses an Hypothecation of Goods in which it specifically describes the household and business goods (with serial numbers and estimated values) to be pledged as collateral for the loan. (The spouse residing in the premises from which the household goods are pledged must also execute the hypothecation). Collateral also includes ―50% of the inventory‖ which is only generally described.

Specific conditions included in the pledge among other are as follows:

The said goods are charged to the Bank TO SECURE, as a continuing security, the payment on demand of the amount now or at any time hereafter owing by me/us to the Bank in respect of the loan and interest thereon and costs, charges and expenses as hereinafter mentioned.

In the event of my/our failure to pay on demand any payments that are secured by the said charge, the Bank in its absolute discretion, may on giving a FOURTEEN (14) DAYS NOTICE to me/us, attach and sell all or any of the goods charged

WITHOUT RECOURSE TO ANY COURT OF LAW. The Bank or any person authorized by the Bank, without being liable for

any loss or damage sustained thereby, may attach and sell all or any of the said goods on any terms and in any manner the Bank may think fit. The net proceeds of the sale shall be applied towards payment of the balance due to the Bank on the said account. I/we will accept the Bank's account as sufficient evidence of the amount produced by such sale and of the amount of any costs, charges and expenses thereof. In the event that the net proceeds are insufficient to discharge the full amount of my/our indebtedness to the Bank, I/we will immediately repay to the Bank the balance left outstanding.

I/we shall be entitled to have so returned to me/us any surplus of the net proceeds of sale or any goods so pledged which may not have been sold upon the payment in full of my/our indebtedness to the Bank on the said account.

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require the borrower to deliver such goods until an event of default occurs. Moreover, inventory has not yet been seized and sold by the FI, only the assets specifically described; hence such provision has not yet been ―challenged‖ in the courts.

In other countries such as Indonesia, one FI, in its microfinance operation, accomplishes the pledge of movable assets via a sales agreement: the FI ―purchases‖ the assets but only takes possession of it/them the event of default by the borrower.

Combination of Secured and Unsecured Exposure. Another FI operating throughout Africa has begun to experiment with new policies regarding its unsecured exposure. Though the lending officers in Kenya and Tanzania have not yet moved to fully implement the policy, it could produce significant changes over the longer term. Under the policy, SMEs that have the highest score possible according to the FI’s internal grading system17 _{can access a credit limit of up to $800,000 in Kenya and $375,000 in}

Tanzania, with collateral coverage as low as 20%. SMEs with somewhat lower, yet strong scores can access a credit limit of up to $400,000 in Kenya and $175,000 in Tanzania, with collateral coverage as low as 40%. Real estate is sill the only valued collateral; chattel mortgages and charges on all business assets, though taken, are not valued. Notwithstanding, this is a bold, new strategy for the institution. Scoring/Behavior Modeling. A number of FIs have developed scoring and analysis models for SME credits, not only to standardize analysis but to serve as an important tool in improving the delivery of profitable financial services to the SME sector. Though the details of such models are highly proprietary, Appendix III provides additional details and insights into the scoring model of an FI in Latin America. Though most FIs are not accepting inventory, accounts receivable and so forth as primary collateral for SME credits, some FIs in Romania are taking the full range of collateral, so as to gain important knowledge and experience which, when measured statistically, can eventually be incorporated into their collateral policies. This is consistent with practice in the U.S. where some FIs, based on the statistical performance in their small business portfolios, make credits to small businesses for based on the SME’s average levels of accounts receivables and inventory, yet do not monitor or control such assets on the back end (e.g. on a monthly or quarterly basis).

Alternative Guarantees. Personal guarantees of the business owner and/or directors (in the case of limited liability companies) are generally required to be executed in all the countries surveyed. In theory, this commits the borrower’s full resources to the repayment of the business loan and preempts the transfer of ownership of business assets to the owner/director or other entities owned by the owner/director for purposes of avoiding repayment of the business loan. In reality, it is not uncommon for such assets (which are not specifically charged in the chattel mortgages) to be transferred to entities controlled, but not owned by the owner/director, hence not recoverable by the FI.

In a number of countries around the world, personal guarantees of third parties are often required for personal ―unsecured‖ loans which are not covered by specific employer schemes (e.g. where the employer remits monthly payments directly to the FI). Of the countries surveyed, Bosnia and Herzegovina makes the most extensive use of individual third party guarantors. However, this is increasingly widespread, particularly in countries where credit bureaus are operational. Not only does the client not want their credit history damaged, but neither does the guarantor.

Guarantors and other ―peer pressure‖ mechanisms have been widely used in microfinance around the world and vary considerably depending on the country’s legal framework. In El Salvador and Ecuador for example, pledges on the microentrepreneur’s business and personal assets designate a depository to be responsible for the goods pledged; if the assets disappear, the depository can be put in jail. The

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SMEs that have: annual sales in excess of $2 million, profitability for more than 3 years, debt to equity ratio of less than 1:1, developed management structure, etc.

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guarantor is often designated as the depository; other times, the mother is designated as the depository as most borrowers do not want their mothers to be put in jail for their non-payment.

As mentioned in Bosnia and Herzegovina, FIs use bills of exchange, which if dishonored, enable them to block the SMEs accounts throughout the entire financial system. In Uganda and Bangladesh, among others, the non-payment of drafts is a criminal offense. In such case, an MFI will require the borrower to execute drafts at loan closing; in the event of a missed loan payment, the drafts are presented. If they are not paid, the borrowers may be put in jail until such payment is made.

Disbursement Before Perfection of Security Interest. One recent entrant in to Kenya’s small business lending is testing the viability of disbursing loans before registration is concluded. As soon as the lawyer issues a legal opinion that the documents have been fully executed and that there should not be any issues, then the FI moves to disburse the loan even though it could be 4-6 weeks before the mortgage is actually registered. This approach was used successfully by First National Bank in South Africa on its microenterpise loans of less than $10,000.

Establishment of Auction Center. In Bosnia and Herzegovina, FI indicated that enforcement proceedings against movable assets can take years because of the excessive court backlog. Despite the availability of out-of-court enforcement procedures under the new law, FIs have yet to take advantage of the law and develop the capacity to seize, store and sell the pledged assets. Through the bankers association, they are hoping to establish an auction center which will eventually help resolve this problem.

Defensive Strategies. Given the challenges involved in enforcing security interests and the courts’ tendencies to favor the debtors, some FIs respond with ―defensive‖ strategies. In the case of Kenya where FIs expect court challenges related to allegations of excessive penalty interest and fees, some FIs reduce the interest rate on non-performing loans to the base rate and waive all penalty interest and late fees.

Another common challenge relates to rural properties which have traditionally been inherited and/or are the source of livelihood for the family. It has become virtually impossible for FIs to enforce such security interests. One such argument advanced by children, including minors, is that such land has been inherited by the parents and is only being held in trust by the parent until such time that it is their turn to inherit. Another argument is that the land is the source of the family’s livelihood (e.g. in the case of agriculture land) and that the courts should not force them off the land. Again, the courts have frequently ruled in favor of the borrowers, thereby causing FIs to adopt policies to only lend against urban properties that have been purchased, and not passed down from generation to generation.

To avoid many of the problems associated with the court process, many FIs work diligently to restructure loans to the greatest extent possible. In cases where the property is not the personal residence, they encourage the borrower to sell the property and support that process in any way it can.

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APPENDIX I: LEGAL ORIGINS

ENGLISH ORIGIN (COMMON LAW)