Movable Property Lending: Lessons Learned from Promoting Innovative Finance in Colombia, Kenya, Indonesia, and Vietnam

On December 10, USAID’s Sashi Jayatileke and Wade Channell hosted Joe Heim of Dopkins & Company and Bar Pereg of Deloitte for a discussion on Movable Property Lending, an inclusive finance tool that has recently been introduced to many USAID presence countries. The panel discussed the specific barriers to uptake for movable property lending, approaches that enable financial institutions to overcome these barriers, and broader lessons learned for the development community. 

Access the webinar recording and presentation slides. 

What is Movable Property Lending and How Does it Promote Financial Inclusion?

Movable Property Lending (MPL) is the pledging of movable or intangible assets, such as vehicles, livestock, manufacturing equipment, inventory, or receivables, as collateral for loans. MPL increases borrowing opportunities for enterprises and individuals who lack fixed assets, such as land and buildings, making MPL particularly advantageous for women and women-owned small and medium enterprises (SMEs), who are less likely to own the real estate than their male counterparts in emerging economies around the world. In practice, a woman in Kenya who does not own land could access credit by pledging her machinery, livestock, or laptop as collateral for a loan.

USAID has worked in collaboration with governments for many years to promote the enabling conditions for MPL. While many economies have developed legal frameworks for movable property-secured transactions and created modern web-based collateral registries for financial institutions to assess whether assets have already been pledged to other parties, a number of barriers have limited widespread adoption of MPL in many emerging economies.

To address these barriers, USAID collaborated with Dopkins & Co., a certified public accounting and consulting firm, specializing in asset-based lending due diligence, and Deloitte Consulting, using two different approaches, to promote the adoption of MPL in four different countries. Dopkins & Co., working with stakeholders in Colombia, conducted a technical assessment and created tools for financial institutions to successfully conduct field examinations for MPL lending. Meanwhile, a team from Deloitte’s international development practice, working in Indonesia, Vietnam, and Kenya, set out to determine whether blended finance investments could incentivize financial institutions to adopt MPL, and connected private investors to companies with promising inclusive finance products.

What are the barriers to MPL?

For both projects, one objective was to better understand the intricacies of the barriers to MPL. The webinar participants noted a number of challenges that have, in some instances, inhibited the uptake of MPL, ranging from technical capacity to cost issues for financial institutions. The speakers highlighted the following factors as barriers to MPL:

• Lack of enabling infrastructure such as secured transactions laws and collateral registries in emerging economies
• In economies with recent regulatory reforms, lack of technical expertise to offer MPL within financial institutions
• Cultural and regulatory burdens that create risk-aversion among financial institutions
• Lack of competition in the financial sector for institutions to pursue lower-margin or new customer segments
• Marginal risk, acquisition, operation, and transaction costs for MPL that reduce the profitability for many financial institutions

Heim and Channell highlighted that in countries such as Colombia where MPL is relatively nascent, institutions often lack the expertise and risk-tolerance to develop the capacity to offer MPL.

“Banks are by law and nature very conservative, and they have to use new tools of the trade to successfully offer MPL,” Channell said. Heim additionally outlined challenges such as culture and market acceptance that can inhibit both lenders and borrowers from using new products.

Pereg added to this analysis by suggesting that most financial institutions take a profit-driven approach to assessing whether to provide new inclusive finance products.

“Private sector companies want to make profit. At the end of the day, banks will only offer products that follow development objectives if it’s worth it for them,” Pereg said. She highlighted that it is often more costly for banks to value and repossess movable assets because they can quickly depreciate and can be vulnerable to fraud, making it important for institutions to develop systematic tactics to decrease these costs and increase the profitability of lending.

As noted by the panelists, the barriers to MPL are both systemic (i.e. regulation, infrastructure), and transactional (e.g. transaction costs for individual institutions). Thus, USAID’s work has endeavored to address these issues at multiple levels.

What approaches could lead to increased adoption of MPL?

The panelists described how their projects have succeeded in identifying actors and approaches to increase MPL adoption in the private sector.

In Colombia, Dopkins and Co. developed a framework and set of tools for financial institutions to conduct field examinations of movable assets, enabling lenders to more efficiently appraise and assess the security of individual assets providing a standard procedure for banks to adopt. Developing technical capacity in field examination will allow financial institutions to choose borrowers with high confidence so they can recover the value of loans if customers default. Heim also highlighted the importance of collaboration between lenders in Colombia and technical experts who have participated in long standing movable property regimes in the US and Canada, allowing for sharing of lessons learned on risks and approaches that have led to successful MPL adoption. 

“The Field Examination Framework is a key mechanism used by banks and financial institutions to value, monitor, and control the eligible collateral of small and medium-sized enterprise borrowers in countries utilizing asset-based lending structures,” Heim said.

Meanwhile, Deloitte identified a set of tactics that successful MPL lenders in Kenya, Indonesia, and Vietnam, use to increase potential profit by reducing risk, transaction, acquisition, and operation costs. These tactics include asset specialization, whereby lenders take security on a limited number of collateral types to create expertise in valuation and repossession of those assets. For example, in Kenya, several lenders offer asset finance for agricultural machinery or motor vehicles, gaining expertise on those specific assets. 

Additionally, through its field work, Deloitte prioritized a set of financial institutions ranging from commercial banks to fintechs with the capability to provide MPL and discussed the specific incentives and investments needed. They then approached investors to gauge their interest in investing in these companies, making connections where investment transactions could happen.

 “We’ve been positively surprised with the traction and interest from investors,” Pereg said. “We’re looking forward to seeing whether the transactions will close in the next few months.”

How can the development community continue to push the needle on MPL?

The panelists expressed optimism regarding progress achieved in MPL in recent years but also suggested that there is significant work to be done. For both Dopkins and Deloitte, further monitoring of the volume of MPL transactions and the impact on women and women-owned businesses will be necessary. “Movable property lending provides a disciplined approach for banks and financial institutions to provide financing solutions to a variety of industries, particularly those in areas of international development,” Heim said.

To further the advancements that have been made thus far, each of the panelists suggested the need for the development community to continue to collaborate in new ways with the private sector. Pereg highlighted the need for the development community to acknowledge that products must be profitable for the private sector to encourage sustainable adoption. As with any other product, companies will only adopt MPL if they see the business case to attract new customers such as women-owned SMEs. While many financial institutions understand that MPL can attract new customers or expand their footprints with existing customers, deeper understanding of the specific approaches and products that can lead to profit will lead to further MPL adoption.

“As development practitioners, we need to shift our mindset in private sector engagement to believe that to accomplish our intended outcomes, we also need to help institutions make money,” Pereg said. “Companies won’t pursue development objectives if they cannot make profit; we can create an impact by prioritizing providing support or collaboration to the companies that are as aligned as possible with our development agenda.”

Heim and Channell both acknowledged the need for an ecosystem approach to MPL uptake, incorporating not just financial institutions but also other donors and technical experts.

“This is a large team sport, and you need many players on each team,” Channell said.

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