The government of Pakistan recently launched the Secured Transactions Registry (STR) pursuant to the Financial Institutions (Secured Transactions) Act, 2016. The STR will be used for registration of security interests/charges created by entities other than companies on their movable assets such as receivables, intellectual property, inventory, agricultural products, petroleum or minerals, motor vehicles, etc.
STR has been developed with the financial support from the United Kingdom’s Department for International Development (DFID). The launch of STR is presumed to be yet another millstone towards improving financial inclusion, growth of the private sector.
The Government of Pakistan has authorized the Securities and Exchange Commission of Pakistan (SECP) to operate / manage STR.
What is Secured Transactions Registry?
Secured Transactions Registry is an electronic database wherein financial institutions can record charges or security interests created by unincorporated entities including sole proprietorships and partnerships or individuals on their movable assets. The STR is in electronic form and can be accessed through a dedicated website at any time.
Owing to STR, the Financial institutions can now file security interests online. Registration process is completely system based fully automated and the registry is searchable by general public.
The following activities can be performed by Financial Institutions or individuals using STR website:
- Financial institutions can register, amend and terminate security interests created against a movable property of an entity.
- A person can search for existing security interests on movable assets of entities (other than companies) registered in the STR. Public searches are free of charge while there is a fee for certified searches.
- A person can also search the register of charges maintained under section 102 of the Companies Act, 2017.
How it Works
Using the online STR mechanism, the financial institutions can now make an informed lending decision.
An entity either an individual / business / organization will contact a financial institution for a loan. The FI will seek a collateral / security against the loan. The entity may offer the FI a security over its movable assets.
Furthermore, the FI will search the records of the STR to see whether any other FI has already registered a security interest on the asset(s) offered as collateral.
If the FI finds that a security interest in the proposed collateral has not yet registered, the FI will record its security interest on that movable asset. On the other hand if the FI finds that the asset offered as collateral has already been registered, it can exercise either of the following option:
- Contact the existing FI to determine if there is sufficient excess value in the collateral to secure the proposed loan.
- Obtain an agreement with the existing FI to subordinate (become second in priority) the existing security interest.
- Decide not to lend because the credit risk is too great.
The secured transactions registry will also help individuals / entities willing to purchase a movable asset from another person or entity. A prospective buyer may visit the STR website and search whether any third party has any pre-existing security interest over that asset. This will enable the buyer to take an informed decision to purchase a particular asset or not.
What is a movable asset?
The movable asset or property means any tangible or intangible property other than immovable property, including but not limited to receivables; Rights under letters of credit; Rights under trust receipts; Securities (including Government securities) other than hook-entry securities; Right to funds credited in a deposit account; Title documents; Negotiable instruments; Intellectual property, including patents, trademarks, copyrights, trade names, goodwill, royalties; Stock in trade; inventory; Interest in partnership and other form of entity; ornaments; Jewellery; stones; goods in transit; Agricultural produce; leaves; Grass, including growing grass; Petroleum or minerals that have been extracted; Motor vehicles.
What is security interest?
security interest means a right, title, encumbrance or interest of any kind upon movable property created or provided for by a security agreement in relation to a transaction that in substance secures the payment or performance of a customer’s obligation under a finance without regard to the form of the transaction or the terminology used by the parties or the identity of the person who has title to the movable property, and includes any charge, mortgage, hypothecation, fixed charge, floating charge, assignment, lien, pledge, assignment of receivables by way of security and transactions under which a secured creditor retains title such as a finance lease, hire purchase agreement, sale and lease back arrangement, conditional sale agreement and retention of title arrangement, having similar effect.
What are the Benefits of Secured Transactions Registry
Rural enterprises and SMEs have low access to formal credit in Pakistan. Therefore, one of the reasons for their low credit penetration is their inability to provide quality collateral which meets their risk profile to the satisfaction of creditors / financial institutions. Therefore, SMEs do not even apply for loans as they are certain that they will unable to meet the collateral requirements of financial institutions.
Most SMEs in Pakistan are in trade and services having a share of 51% and 35% respectively. The assets of these SMEs mostly comprise of movable property, such as inventory and receivables and have limited immovable property to mortgage thus hindering their ability to grow. Additionally, the creation of secured transaction registry will greatly facilitate such small borrowers from SME and agriculture sector to secure credit from financial institutions against their movable assets and leverage their assets into capital for investment and growth. The Government of Pakistan has committed to expanding credit to at least 700,000 SMEs by 2023, as compared to less than 200,000 at present.
Similarly, a digitalized STR will provide greater transparency and visibility around recorded charges or security interest to the financial instructions.
With regard to overall business environment of Pakistan, STR will improve global ranking on the World Bank’s ease of doing business index. This initiative would help in meeting “Getting Credit” indicator of World Bank’s ‘Doing Business Index’ and make Pakistan able to meet 7 out of 12 indicators. Currently, Pakistan is on 108th position on Ease of Doing Business Index.
Secured transactions registry will also assist in improving efficiency of movable assets and use as collateral to secure credit. Moreover, the STR will redress the information asymmetries and legal uncertainties in the existing processes.
A good explanation