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
This article was first published in Addis Standard
