Banks must now allocate five percent of their annual loans to individuals in the agricultural sector and take movable property as a guarantee, according to a new directive that was issued last week.

Issued on February 26, 2020, by the National Bank of Ethiopia (NBE), the directive compels financial institutions to direct the loans to cooperatives, unions and small and micro enterprises in the agricultural sector beginning July 1, 2020. The directive also operationalises a law that allows movable assets to be taken as collateral to access loans.

The directive follows a proclamation that was legislated a few months ago, enabling banks to take movable assets as collateral for loans and advances. It allows low-income borrowers such as smallholder farmers and lower-scale entrepreneurs to secure loans for investment and job creation purposes.

If banks cannot disburse the loans directly, they can allocate a budget and partner with microfinance institutions to provide the credit.

The agreement may include motor vehicles; trailers; agricultural, construction or industrial machinery; and serial-numbered collateral held for business use. The collateral agreement will include the type of collateral, quantity or specific listing.

The scheme is part of the government's attempt to increase loans to the agricultural sector. In the last five years, less than 10pc of total loans were directed to agriculture.

"We targeted to increase this value between 30pc and 40pc," Anteneh Girma (PhD), a senior advisor at the Ministry of Agriculture (MoA), said during a meeting held a month ago at the Office of the Prime Minister on agricultural reform.

To move forward with the service, the central bank has established a Movable Collateral Registry Office, headed by a director, and the Electronic Collateral Registry System. The Office will approve and provide user accounts for creditors to access the collateral registry upon fulfilling the proper requirements.

"Establishing a single comprehensive electronic registration regime for secure transaction in movable property to determine priority rights among competing claimants is necessary," reads the directive.

Financial institutions with a user account at the registry will collect fees on behalf of the registry office of the National Bank of Ethiopia and credit the collected fees to the account of the Movable Collateral Registry Office.