Will a new bill by the World Bank’s International Finance Corporation (IFC), which is designed based on foreign (western country) law, be suitable to the Ethiopian local context?
By Dr. Asress Adimi Gikay* (for EthiopiaOnline) |
A new law governing security interests in movable assets in Ethiopia has been drafted with the assistance of the International Finance Corporation (the investment wing of the World Bank). It is expected to be enacted by the Ethiopian Parliament within the coming two months. If enacted, the law would permit borrowers to use all types of movable 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 foresees the establishment of a collateral registry office in charge of registering all security rights in movable assets. In theory, the new legal framework would give businesses and consumers better opportunity to access credit at low cost by granting security rights to creditors in broad range of movable assets. But the draft proclamation has also serious defects that must be fixed. The bill being modeled on Article 9 of Uniform Commercial Code of the United States (UCC) has certain components that are incompatible to the Ethiopian current socio-economic context besides the lack of transparency in its drafting and deliberation processes thus far.
● Lack of Transparency
The fact that the draft proclamation has not been subjected to sufficient scrutiny of the broader Ethiopian stakeholders is a good signal of the potential defects in it that are being kept out of the public’s sight. The letter to which the bill was annexed, sent out by the National Bank of Ethiopia on November 17, 2017 was addressed to the Ethiopian Bankers Association, Ethiopian Lawyers Association and the Association of Ethiopian Micro-Finance Institutions, soliciting comments from them. Other stakeholders are officially unaware of the draft proclamation and how it impacts them or interests groups they represent.
The Ethiopian Consumer Protection Association, which advocates for consumer welfare in Ethiopia, is not officially supplied with the bill despite the fact that the draft proclamation raises a plethora of consumer protection concerns. The International Finance Corporation being the investment wing of the World Bank Group, has its own interest which is not aligned with the interest of the broader Ethiopian stakeholders such as small businesses, farmers, and consumers, which partly explains why the draft proclamation has not been subjected to adequate public scrutiny. Both as reform advocate and an investor in sectors such as leasing and hotel industries and a potential creditor, the International Finance Corporation promotes creditor-friendly laws. Thus, the strictly managed and partially transparent legal reform process is an outcome of the need to preserve the self-interest of the International Finance Corporation through keeping away the problematic legal provisions that it aggressively advocates for from criticism and potential revision detrimental to its interest. As its name stands, the International Finance Corporation is a global corporation, not a charity organization. It gives nothing for free and assists no country without advancing its self-interest. This does not mean that the reform does not benefit the Ethiopian people at all. It only means that an increased transparency is necessary to benefit the Ethiopian people more in the long-run.
● Incompatibility with the Current Level of Technological Infrastructure
One of the illustrations of the drafting committee’s disregard for the Ethiopian socio-economic context is the fact that the bill mandates the establishment of an electronic collateral registry in a country that suffers from insufficient electricity and internet access. According to a 2010 report, less than 50% of the total population of Ethiopia has access to the internet (Vivien Foster and Elvira Morella, Ethiopia’s Infrastructure: A Continental Perspective, (The International Bank for Reconstruction and Development / The World Bank, 2010), p. 15). Certainly, eight years later, the situation cannot be expected to be the same. But it should not be expected to have changed dramatically either. Undoubtedly, the necessary infrastructure for the proper functioning of electronic collateral registry is not present in Ethiopia today. Even in the United States, a country whose law the draft proclamation is based on, some states including New York still administer paper-based registration parallel with electronic registration. Is Ethiopia technologically more advanced than New York? Essentially, the bill if enacted, would not be useful to the Ethiopian farmers or rural dwellers in general, the great majority of whom are either inadequately 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. Perhaps, that is just a false campaign promise of the World Bank to carry out the reform that benefits itself as a global corporation and its allies, big financial institution.
● Undermining of Due Process of Law
The draft proclamation, if enacted in its current form, would potentially deprive consumers of due process of law. The bill 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, created by the Americans is largely unfamiliar to Africa in general or Ethiopia in particular. But even the Americans subject it to strict ex post facto court supervision with dozens of rules protecting the consumer including through the requirement of repossessing peacefully, and the harsh criminal and civil penalties for breaching the peace. In Louisiana, a civil law US state, the procedure is strictly regulated to make sure that public peace is observed in conducting the process. More precisely, in Louisiana, the procedure is allowed only if the collateral is motor vehicle and the creditor gives an advance notice to the debtor that “Louisiana law permits repossession of motor vehicles upon default without further notice or judicial process.” Even still the creditor has to conduct the repossession peacefully. But in Ethiopia, the procedure is far less regulated than in Louisiana.
If the new law passes without change, 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. 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 be established) 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 he/she has not defaulted, there is nothing he/she can do once he/she has signed the repossession agreement when he/she obtained the credit.
In the United States, despite the high threshold for conducting collateral repossession, the occurrence of confrontation between repo men and debtors ending in tragic deaths or serious bodily injuries are common. Sometimes the repo men shoot the property owners dead. Other times, the property owners takes the repo men’s lives first (another similar story). This incidents may not be likely to occur in Ethiopia due inaccessibility of firearms to the Ethiopian people. But possible conflicts of various degrees between debtors or family members of debtors’ and the repossession agent/the police would be inevitable.
In Ethiopia, there is still low literacy level, low respect for rule of law, high tendency for abuse of power and police violence. This bill further strengthens the already brutal police state. It creates an opportunity for undesirable partnership between big financial institutions and lenders and the state to abuse consumer debtors and harass them as they wish, with no legal repercussion. A balance that does not harm the financial system can be found and the bill could still be improved based on the experiences of other legal systems. The fact that this bill is weeks away from parliamentary approval without wider public debate is misguided. It is more so because of the involvement of the World Bank that loves to lecture the rest of the world about rule of law and transparency.
It is time that the Ethiopian legal professionals, industry experts and various consumer representatives wake up and ask for more transparency from the World Bank and from the Ethiopian government.
* Asress Adimi Gikay, PhD is an Ethiopian scholar based in Pisa, Italy. He is the author of IEL Economic and Commercial Law Ethiopia (2014) and Competition Law in Ethiopia (2016) published by Wolters Kluwer. His research focus is consumer protection in financial services.
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