Secured Transactions Regime in Palestine: Expectations and Challenges Commentary
Secured Transactions Regime in Palestine: Expectations and Challenges
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JURIST Guest Columnist Ibrahim Fares discusses the challenges surrounding the adoption of the Secured Transaction Draft Law in Palestine…

Recently the International Finance Corporation (IFC), a part of World Bank Group, finished the final draft of the Secured Transaction Draft Law (STL) in cooperation with the Palestinian Ministry of National Economy and other related parties. The main purpose of the STL is to promote development of the Palestinian economy and its growth by creating new tools and opportunities; stakeholders raised many questions about the feasibility of this law in the Palestinian legal system. Notably, none of the Arab countries has such law in force yet. However, the United Arab Emirates and Jordan are still discussing their draft laws. Palestine is the sole Arab country that has finished a draft law, which is now at the president’s office, ready for enactment. This article aims to highlight new developments in the STL, the scope of the STL, envisaged benefits and challenges facing such a law.

Challenges in the Current Secured Transaction Regime

The legal environment in Palestine, and in the Arab countries in general, does not support a secured transactions regime. Outdated and traditional secured transactions regimes pose a great obstacle for lenders and borrowers in trying to create modern business and expanding access to finance for small and middle business. Expanding access to finance is a significant factor in improving developing economies. In Palestine, limited access to credit remains one of the greatest barriers to economic growth and development. Thus, a reformed secured transaction regime is a necessity for the Palestinian economy. In Palestine, there are many legal problems in secured transactions regimes, including inadequate legal protections for borrowers and lenders, outdated regulations, and restricted access to credit. The Palestinian legal regime remains far from the rest of the world in terms of the legal rights assured to borrowers and lenders. Lenders’ policy in establishing collaterals depends on creating immovable collateral, not movable collateral. How the STL will change such policy for lenders is a crucial issue.

Policy of the STL

The policies of the STL depend on two key points: an access to finances and availability of sufficient collateral. In Palestine, constrained access to finances remains among the top limitations on private sector growth. Such situations are not just in Palestine, but also in more than half of private firms in emerging markets. The number of firms that use loans to finance investments in the developing world generally is half the number of those firms operating in countries of the Organization for Economic Cooperation and Development (OECD)[PDF]. Creating a good legal framework of secured transactions would help the firms to access finances. The paper polices of the STL relies on “Access to Finance” as one of the main legislative polices and as part of the philosophy of the law. The policy also focuses on improving lending terms and improving financial system stability as main features in establishing a well-designed secured transaction regime.

In Palestine, credit applications are often rejected for insufficient collateral, i.e. unacceptable or unsuitable collateral. Business owners don’t apply for loans because they know that they cannot meet collateral requirements of banks. Unavailability of collateral is frequently not the problem; rather, it is the inability to utilize valuable assets as collateral. While in the developing world 78 percent of the capital stock of a business enterprise is typically in movable assets such as machinery, equipment or receivables, only 22 percent is in immovable property. Financial institutions are reluctant to accept movable property as collateral. Banks prefer real estate as collateral. As evidence to the efficiency of the secured transaction system, in the United States, movable property makes up about 60 percent of enterprises’. Capital stock and lenders consider such assets to be excellent sources of collateral. Movables account for around 70 percent of small-business financing. The asset-based lending industry in the US has grown rapidly since the mid-1970s, and movable asset lending has increased 40-fold over 30 years, reaching a total of US $400 billion. The industry has grown by 12 percent annually over the past ten years. Legalizing movable assets as sufficient collateral by providing broad protections to lenders upon default of borrowers is one of the main polices of the STL.

Envisaged Benefits Upon Reform the Secured Transaction Regime

In Palestine, a majority of businesses are micro, small and medium enterprises (MSMEs). The MSMEs have therefore been operating in a weak legal environment with inefficient financing opportunities, tight resources for up-scaling, a weak marketing ability and limited access to markets. Providing legal structures in which movable assets in the Palestinian market can be effectively used as collateral will significantly improve access to finances by firms that need it most. A sound legal and institutional infrastructure is critical to the maximization of economic potential of movable assets so that they can be used as collateral. Well-functioning secured transactions systems enable businesses to use their assets as security to generate capital, from the farmer pledging his cows as collateral for his annual operating line of credit to the seller of goods or services pledging the cash flow from customer accounts as collateral for business expansion. An economic analysis suggests that small and medium-sized businesses in countries that have stronger secured transaction laws and registries have greater access to credit, better ratings of financial system stability, lower rates of non-performing loans and a lower cost of credit[PDF].

The lender provides loans secured by the assets of the borrower. The STL has determined several types of collateral. Collateral may include accounts receivable, inventory, raw materials and work in process, machinery, vehicles, intellectual property rights or other assets where value can be determined. The secured lender may establish a revolving credit facility where the borrower provides a pool of collateral that the lender translates into operating cash or working capital. The lender agrees to grant a line of credit up to a maximum amount, which is secured by a borrowing base made up of inventory, receivables and cash. Notably, in the current situation the new types of collateral established in the STL are not used as collateral. Upon implementation, the STL lenders would be hesitant to use these collaterals, and they may take time to start accepting them.

Well-designed secured transaction systems contribute to robust financial systems by promoting credit diversification, allowing non-bank financial institutions (NBFI) to provide credit (reducing the dependence on bank credit) and rely less on real estate collateral. Financial institutions (FIs) benefit from these systems by: (i) being able to diversify their portfolios by accepting movables, including more liquid assets such as receivables or investment instruments; (ii) having access to information on existing collateral interests in movable assets and their priorities; and (iii) making possible better reporting mechanisms on collateralized lending practices to the supervisory or regulatory authority, usually central banks.

Scope of the STL

The proposed law applies to all transactions where a debt or other obligation is secured by movable collateral, regardless of the legal form of the transaction. The proposed law’s provisions for registration and prioritization of interests also apply to leases of goods and the sale of accounts receivable and secured sales contracts. The proposed law’s scope specifically excludes claims on employee pay, the sale of accounts receivable and secured sales contracts as part of the sale of a business, assignment of accounts for collection and assignment of a right to payment if the assignee must also perform. The STL includes all types of relevant interests that modern laws include. It provides for simple and quick creation of a collateral interest and provides for it to be effective between the parties without registration. It also sets out a transparency-based priority scheme that conforms to modern standards. The STL calls for notice registration and provides that it can be the optimal electronic registry that enforces registration standards without human judgment. And finally it provides for quick and effective enforcement of a collateral interest in case of default by the debtor. The STL includes all of the key features of modern secured transactions laws that support access to credit based on movable collateral.

A great influence is expected on the Palestinian economy once the STL enters in force. “It is a revolution in the financial field.” an expert in the IFC, said. However, there are concerns related to addressing legal provisions of the STL by relevant parties. Judges are not familiar with some legal provisions, like using movables assets as collateral. They may not understand how a machine may secure one loan or more. Lawyers are not familiar with some legal terms like “receivable accounts.” Such terms, when translated to Arabic, are ambiguous. Lenders and borrowers are not familiar with using an electronic private registry. These parties should be aware of their rights and commitments.Therefore, the IFC is studying holding specialized courses about implementation of the law for all relevant parties.

Ibrahim Fares received an L.L.B in law from Al al-Bayt University in Jordan, a masters degree in law from Birzeit University in Palestine, an L.L.M from the University of Pittsburgh School of Law and an L.L.M. from Lazarski University in Poland. He is a member of the Palestinian Bar Association, and he is an arbitrator in commercial and civil transactions. He has over 7 years’ experience in corporate law and finance as senior associate at one of Palestine’s most prominent law firms, Husseini and Husseini, where he specializes in commercial transactions, mergers and acquisitions and contracts. He has been intricately involved with the development and drafting of a new secured transactions legal framework in Palestine

Suggested Citation: Ibrahim Fares, Secured Transactions Regime in Palestine: Expectations and Challenges, JURIST – Professional Commentary, June 2, 2015, http://jurist.org/professional/2015/ibrahim-fares-secured-transactions-regime.php.


This article was prepared for publication by Cassandra Baubie, an Assistant Editor for JURIST Commentary. Please direct any questions or comments to her at commentary@jurist.org

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