Ms Hawa Nassolo's small textile business has been a staple in Kampala's bustling markets for years. Despite her success, Nassolo struggles to access the credit she needs to grow her business. The reason? She does not own a plot of land or a car, the traditional collateral required by banks.
“I have tried to get a loan from several banks, but they all want collateral that I just don't have," Nassolo said, with frustration etched on her face. “It is like they are saying, 'If you are not wealthy, you are not worthy of credit.”
Nassolo's story is not unique. Thousands of small business owners in Uganda face similar challenges in accessing credit due to stringent collateral requirements.
The moveable collateral law, enacted to increase access to credit for micro, small, and medium-sized enterprises (MSMEs), has failed to gain traction.
On May 31st 2019, the Security Interest in Movable Property Act (SIMPA) came into force.
SIMPA’s major objective was primarily to provide for the use of movable property as security by both individuals and corporations and to provide for priority, registration and enforcement of the security created.
Industry experts say financial institutions remain skeptical about accepting movable assets, such as livestock or machinery, as collateral due to concerns over enforceability and recovery.
The main challenges faced by micro and small businesses in accessing credit is the stringent collateral requirements and the high interest rates which stem from the high levels of informality of these businesses.
This makes them very risky because the financial institutions have very little information on these businesses to enable them make sound credit decisions.
According to Mr Joseph Lutwama, acting executive director of Financial Sector Deepening Uganda (FSD Uganda), "The law is yet to have the effect desired because the financial institutions don't have confidence in movable collateral. The current legal and enforcement frameworks are not strong enough to guarantee a secure movable collateral regime."
Lutwama noted that financial institutions prefer traditional collateral such as titled land and motor vehicles because they are easily verifiable and enforceable.
“Titled land and motor vehicles are still the most preferred forms of collateral because they are easily verifiable and enforceable. Movable collateral, on the other hand, poses significant risks, making it challenging for financial institutions to accept,” he added.
Only where it has been implemented is predominantly among Tier 4 Microfinance Institutions( MFIs) and Microfinance Banks such as Centenary Bank. But it is for much smaller loans for shorter durations.
The expert further attributes the slow uptake of movable collateral to the lack of confidence in the current legal and enforcement frameworks.
Lutwama notes: "The law is in place, but the supporting infrastructure is weak, making it difficult to guarantee the security of movable assets."
He adds that the law is yet to bite because the financial institutions don't have confidence in movable collateral. The current legal and enforcement frameworks are not strong enough to guarantee a secure moveable collateral regime.
“For example, if one used cattle to secure a loan and they defaulted on that loan, it would be difficult to enforce that collateral because they cannot guarantee that the cattle still exist or whether they are still in good health,” Lutwama said.
This would not be the case with physical collateral like land or motor vehicles.
For Nassolo, the lack of access to credit means she cannot expand her business or hire more employees.
“I have big plans for my business, but without credit, I'm stuck,” she said.
However, there are alternative options Nassolo can explore.
“Nassolo could consider using her business assets, such as machinery or equipment, as collateral,” advised Lutwama.
“She could also explore non-traditional collateral options, such as invoice financing or inventory financing, which can provide her with the necessary capital to grow her business.”
So, then how have industry players like FSD Uganda come in to help?
Lutwama acknowledges the challenges, saying FSD Uganda is working with private and public sector actors to address the structural bottlenecks in the movable assets ecosystem.
"Our role is to facilitate an enabling environment that builds confidence in movable collateral. By strengthening the legal framework and enforcement mechanisms, we can unlock the potential of movable collateral to extend financial inclusion to marginalised populations,” Lutwama explained.
The moveable collateral law is critical in promoting financial inclusion, particularly for women and youth who lack traditional collateral. However, until the supporting infrastructure is strengthened, its impact will remain limited.
According to Ms Stellah Kakwezi Olimi, head of Chattels Securities Registration at the Uganda Registration Services Bureau (URSB), the bureau has made significant progress in registering movable properties.
“We have received and recorded several properties from creditors,” she said.
The URSB has established an electronic security interest in movable property registry, which allows creditors to publish their secured interest in a chattel property, protecting their rights.
However, Olimi emphasized that creditors must obtain the borrower's consent before registering their collateral in the registry.
“This is an important safeguard to ensure that borrowers' rights are protected,” Olimi explained. “By requiring creditors to obtain consent, we can prevent unauthorised registration of collateral and ensure that the registry is used fairly and transparently."
According to the URSB Annual report 2024, the value of security interest notices reveals that individuals hold a total value of security interests at Shs7.1 trillion.
Medium enterprises have Shs3.9 trillion, large enterprises have significant values of Shs158b, while small enterprises and micro enterprises have lower values, with small enterprises totaling Shs149b.
