Amendments to Financial Institutions (Secured Transactions) Act 2016 proposed

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP) have proposed amendments to the Financial Institutions (Secured Transactions) Act 2016 to extend the scope of Secure Transaction Registry to future assets, products and replacements of original assets, all types of debts and obligations and absolute assignment of receivables.

The National Assembly's Standing Committee on Finance, Revenue and Economic Affairs will review and discuss "the Financial Institutions (Secured Transactions) Amendment Bill 2020" here on Thursday.

An amendment is also proposed to regulate security interests on the basis of their function, not their form. Moreover, the traditional terminology for security interests (like pledge, hypothecation) is used only in the definition of "security interest" in section 2(xlviii) while the term "security interest" is used in all other provisions. It is also proposed not to require the filing of security agreement and allow advance registration of security interest based on authorization by the entity. A charge/security interest may be registered for a period of up to 5 years, which is extendable, if required.

The Financial Institutions (Secured Transactions) Act, 2016 provides a legal framework for creation, perfection, priority and enforcement of security interest on movable assets e.g. receivable, inventory, jewelry, agricultural produce, intellectual property etc. It also provided for establishment of Secured Transactions Registry for entities other than companies. SECP has operationalized the registry on April 30, for registration of security interests/charges created by entities other than companies on their movable assets offered as collateral to financial institutions.

In Pakistan, companies can register charges created on their assets in the register of charges being maintained by the SECP under the company law. However, there was no such registry where charges created on movable assets of unincorporated entities e.g. individuals, sole proprietorships, partnerships etc., may be registered which constitute a major chunk of SMEs. Besides, legal framework for secured transactions was also lacking. In absence of such legal framework small businesses that do not own real estate found it difficult to obtain affordable credit.

Establishment of the STR has allowed use of movable assets as collateral thereby improved access to finance for SMEs who do not own real property. Besides, it also provides increased protection to secured creditors as it allows checking before lending as to whether the borrower has obtained finance against the same collateral.

These amendments to the STR act will improve Pakistan's ranking in getting credit indicator of World Bank Ease of Doing Business Index in upcoming report by 15 to 20 points. Pakistan's current ranking in this indicator is 119. Earlier, the same have been promulgated through the Financial Institutions (Secured Transactions) (Amendment) Ordinance, 2020.

Copyright Business Recorder, 2020