Ethiopia: Secured Lending Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?

In addition to the general commercial and contract laws, secured finance in Ethiopia is governed by:

• the Proclamation to Provide for a Warehouse Receipts System (372/2003);
• Capital Goods Leasing Business Proclamation 103/1998 and its amendment, Capital Goods Leasing Business Proclamation 807/2013;
• the Movable Property Security Right Proclamation (1147/2019);
• the Operationalisation of Movable Collateral Registry Directive (MCR/01/2020);
• the Civil Code 1960, which regulates mortgages and other security rights in relation to immovables;
• the Commercial Code (Proclamation 1243/2021); and
• the Property Mortgaged or Pledged with Banks Proclamation (97/1998).

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?

Ethiopia has ratified international conventions such as:

• the Cape Town Convention on International Interests in Mobile Equipment and Aircraft Protocol (Proclamation 371/2003);
• the Protocol to the Cape Town Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment; and
• the United Nations Convention on Contracts for the International Sale of Goods (Proclamation 1220/2020)

1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?

The regulatory and tax bodies involved in secured finance in Ethiopia are as follows:

• Federal Documents Authentication and Registration Agency (DARA): DARA authenticates and registers contracts including loans, mortgages and pledges. Authentication is a validity requirement for certain contracts, provided by the law such as contracts relating to immovables. DARA also administers the payment of stamp duty on the security documents to be authenticated and registered.
• National Bank of Ethiopia (NBE): The NBE approves loans prior to registration of the security right. It is also responsible for the establishment of an electronic movable collateral registry system. Any secured creditor or authorised representative can access the electronic register if it meets the requirements stipulated in the law.
• Land Administration Authority: A security right in relation to immovable property is registered by the Land Administration Authority at the place where the immovable property is situated.
• Ethiopian Roads and Transport Authority, Ethiopian Maritime Authority and Ethiopian Aviation Authority: These bodies register security rights in relation to special movables such as vehicles, ships, aircraft and construction machinery.
• Ethiopian Commodities Exchange (ECX): In 2010, the ECX introduced an internal working procedure, which requires the registration of pledge of electronic warehouse receipts held at the ECX in Addis Ababa.

1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?

No clearly articulated or systematic approach has been adopted by the government in relation to secured finance.

Generally, the government does not provide guarantees for private loans. There are no support schemes for secured finance.

Recently, in connection with infrastructure projects developed under the public-private partnership model, there are specific references to forms of government support, such as:

• payment guarantees;
• securities undertakings;
• binding letters of comfort; and
• direct agreements. 

2 Secured finance market

2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?

The secured finance market in Ethiopia is still relatively immature. There are no developed norms or institutions that regulate or monitor the development of this market. Most transactions are bilateral and domestic. There have been few instances of secured transactions in which international banks have partnered with domestic banks to finance large projects. In such instances, the parties have been forced to stretch the existing law to fit it to their specific circumstances, as there are no laws and institutions that systematically regulate the secured finance market.

2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?

Although it is not directly aimed at secured finance transactions, the key regulator of the financial sector is the National Bank of Ethiopia. In its efforts to regulate the work of banks and micro-finance institutions, it issues various standards, risk management guidelines and best practices from time to time.

2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?

Some of the international financing transactions that have taken place in Ethiopia are set out in the following table.

Project	Financer	Year
Financing of Ethiochicken for: the construction of two new breeding farms (60,000 bird capacity each) and one new hatchery facility; working capital for the purchase of parent stock birds; and the partial refinancing of an existing long-term loan.	International Finance Corporation (IFC)	2020
The financing of Luna Slaughterhouse PLC to establish a modern livestock farm and secure quality livestock on a long-term sustainable basis.	IFC	2019
The fnancing of Habesha Breweries SC for an expansion programme.	IFC	2018
An integrated agro-industrial park development project.	Africa Development Bank	2018
Supplementary financing for the Basic Services Transformation Programme.	Africa Development Bank	2018
Financing for the Addis Ababa transmission and distribution system rehabilitation and upgrading project.	Africa Development Bank	2017
Additional financing for loans and grants for the One Wash National Programme.	Africa Development Bank	2017

3 Secured finance providers

3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?

Secured finance in Ethiopia is provided by commercial banks, microfinance institutions (MFIs) and saving and credit cooperatives (SACCOs). Ethiopia's MFIs play a key role in accessing the nation's unbanked population and they are thriving. By making the provision of loans available to more people, they open up opportunities that would otherwise be closed off to the vast majority. SACCOs also provide small loans to members at much lower interest rates than commercial banks.

Ethiopia does not yet have a credit market. However, a new capital markets law has been passed which is expected to govern the sale of bonds, derivatives and other securities.

3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?

The following requirements and restrictions apply:

• Banks and MFIs must be licensed in order to provide their services;
• The aggregate sum of loans or advances extended by a commercial bank to any one person must not exceed 2% of its total capital; and
• The aggregate sum of loans extended by MFIs to any single borrower must not exceed 1% of its capital or 4% of its capital in the case of group borrowers.

Requirements and Restrictions based on nationality of the finance provider

Foreign entities can provide financing only to eligible borrowers, which are exporters or foreign investors operating in Ethiopia. Foreign-source financing is subject to the approval and registration of the loan with the National Bank of Ethiopia prior to signing of the loan agreement.

4 Secured finance structures

4.1 What secured finance structures are most commonly used in your jurisdiction?

As far as debt financing is concerned, the most commonly used financial structures in Ethiopia are:

• commercial loans;
• shareholder loans; and
• intercompany loans.

The finances provided through these loans is secured by mortgage or pledge.

4.2 What are the advantages and disadvantages of these different types of structures?

The advantages and disadvantages of these financial structures are as follows

• Commercial loans: The advantage of commercial loans is that an investor or any borrower can secure a larger loan which it could not otherwise obtain from other finance providers. Banks can raise larger amounts of funds due to their asset transformation capabilities and loan syndication arrangements. The disadvantage is that valuable collateral is needed to secure the loan; if the prospective borrower does not have sufficient collateral, the chance of securing a loan from a bank is almost nil. Furthermore, foreign-source financing requires approval of the National Bank of Ethiopia (NBE).
• Shareholder loans: The main advantage of shareholder loans is that since the lender is a shareholder of the business, collateral is not usually required to secure the loan. However, there is no legal prohibition that prevents shareholder lenders from taking collateral. Usually, shareholder loans are also flexible due to the lender's stake in the business: the lender will be equally interested in the profitability and success of the business. As a result, such loans are usually interest free or interest is charged at very low rates. The downside is that it may not be possible to obtain larger shareholder loans to finance a company.
• Intercompany loans: Companies can lend money to other companies within their corporate group with or without requiring collateral. Usually, intercompany loans carry a lower interest rate than bank loans. However, under Ethiopian law, such loans must be non-recurring; otherwise, this would amount to doing banking business, which is exclusively reserved to authorised banks.

4.3 What other factors should parties bear in mind when deciding on a secured finance structure?

The parties should consider the approval and registration requirements of the NBE with regard to secured finance from foreign sources.

5 Security

5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

Under Ethiopian law, there are a number of available security interests, as follows:

• Movable property: Security rights can be created over:
• • inventory;
  • agricultural products;
  • incorporeal assets (eg, shares, bank accounts, IP rights);
  • corporeal assets;
  • the right to use land (unless prohibited by law);
  • hire purchase agreements;
  • security trust deeds;
  • trust receipts;
  • commercial consignments;
  • mortgage of a business;
  • sale with ownership reserved;
  • sale with right of redemption;
  • warehouse receipts;
  • motor vehicles;
  • trailers;
  • agricultural machinery;
  • construction machinery;
  • industrial machinery; and
  • other property.
• Immovable property: A mortgage can be created over:
• • land use rights;
  • buildings;
  • lease rights; and
  • houses.
• Special movables: Security rights can also be created over special movable property such as ships and aircraft. 

The most common security types in private secured financing transactions are:

• pledges of bank accounts, shares or contractual rights;
• mortgages over a lease (periodical usufruct), right of land or vehicle/machinery; and
• business mortgages.

5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?

The perfection requirements differ based on the type of security or the property involved.

Security right over movable property: A guarantor that has a right in the asset to be encumbered must effect the same through a written security agreement. The written agreement should:

• be signed by the guarantor;
• identify the secured creditor;
• describe the secured obligation; and
• describe the collateral.

A security right in movable property is effective against the debtors and third parties if:

• a notice with respect to the security right is registered in the collateral registry by the secured creditor;
• the secured creditor has possession of the collateral assets, which comprise money, negotiable instruments, negotiable documents and/or certificated securities; or
• the secured creditor has acquired control over the right to payment of funds credited to a deposit account or an electronic security.

Security right over immovable property: A party may secure a debt through mortgage only if it is entitled to dispose of the immovable for consideration. Furthermore, the mortgage agreement must be executed in writing and registered with a notary.

Mortgages over a lease (periodical usufruct), a right of land or any other immovable asset such as real estate must be registered with the Immovable Property Registry. Mortgages are effective only upon registration and the date of registration determines the order of priority between mortgages.

5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?

The main types of collateral used in Ethiopia are as follows:

• Immovable property: Land in Ethiopia is owned by the state, so it is the use right that can be used to create a security right. Ensure that this is registered at the place where the immovable is situated.
• Vehicles: Vehicles are also commonly used as security for financing.
• Business mortgages: A security right can be created over a business as a going concern. Under Ethiopian law, a business mainly constitutes goodwill and other incorporeal assets. A security agreement and notification of the Collateral Registry are important in this regard.

5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Yes.

Goods in Ethiopia are classified as movable or immovable. Lands and buildings are classified as immovable goods. A mortgage can be created on immovable property by law, court judgment or written agreement. A mortgage has effect only if it entered in the Immovable Property Register at the place where the immovable property is registered.

The Movable Property Security Law is sufficiently broad to include all types of property and defines ‘movable property' as including the following:

• inventory;
• agricultural products;
• incorporeal assets (eg, shares, bank accounts, IP rights);
• corporeal assets;
• the right to use land (unless prohibited by law);
• hire purchase agreements;
• security trust deeds;
• trust receipts;
• commercial consignments;
• mortgage of a business;
• sale with ownership reserved;
• sale with right of redemption;
• warehouse receipts;
• motor vehicles;
• trailers;
• agricultural machinery;
• construction machinery;
• industrial machinery; and
• other property, excluding lands, houses and building.

Security can be created over movable property through a security agreement, provided that:

• the grantor has rights in the asset to be encumbered or the power to encumber it; and
• the security agreement is evidenced by a written agreement that is signed by the granter and:
• • identifies the secured creditor and the grantor;
  • describes the secured obligation; and
  • describes the collateral.

5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?

Yes.

A security right over corporeal assets (including cash) is effective against third parties if:

• the secured creditor has possession of the corporeal asset; or
• the security right is registered with the Collateral Registry.

A security right over right to payment of funds credited to a deposit account is acquired upon:

• the creation of the security right in favour of the financial institution;
• the conclusion of a control agreement between the financial institution, the grantor and the secured creditor, according to which the financial institution agrees to follow the instructions of the secured creditor with respect to the payment of funds credited to the deposit account without further consent from the grantor; or
• the secured creditor becoming the deposit account holder.

A security right in a receivable is effective as between the grantor and the secured creditor and as against the debtor of the receivable despite an agreement limiting the grantor's right to create a security right entered into between the grantor and the debtor of the receivable or any subsequent secured creditor. This applies only to receivables arising from:

• a contract of supply or lease of goods or services (other than financial services);
• a construction contract or a contract for the sale or lease of immovable property; or
• a contract for the sale, lease or license of intellectual property.

5.6 Can security be taken over company shares in your jurisdiction? If so, how?

Yes, security can be taken over company shares through a written security agreement, provided that:

• the grantor of the security has the rights in the asset to be encumbered or the power to encumber it; and
• the agreement is signed by the granter and:
• • identifies the secured creditor and the grantor;
  • describes the secured obligation; and
  • describes the collateral.

A security right over corporeal assets (including shares) is effective against third parties if:

• the secured creditor has possession of the corporeal asset; or
• the security right is registered with the Collateral Registry.

To take security over shares, an entry should be made in the register kept at the head office of the company and the share certificates should be transferred to the lender.

5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?

Yes. ‘Inventory', as per Proclamation.1147/2019, includes "corporeal assets held by the grantor for sale or lease in the ordinary course of the grantor's business including raw and semi-processed materials". A valid security right can be created over inventory through a security agreement. A security right over inventory can be created by using warehouse receipt certificates. The security right is effective against third parties if a notice with respect to the security right is registered by the secured creditor in the Collateral Register.

5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?

Generally, the following charges, taxes and notary fees will apply:

• Stamp duty at a rate of 1% on the value secured is payable on security deeds with regard to immovable property; and
• A notarial fee of ETB 5 is payable for authentication and registration of security agreements in Ethiopia.

5.9 What are the respective obligations and liabilities of the parties under the security documents?

Security over movable property: The grantor or secured creditor in possession of the collateral must exercise reasonable care to preserve the asset.

The security grantor must have the rights in the asset to be encumbered or the power to encumber it.

The obligations of the secured creditor are as follows:

• to register, amend and cancel the notice with the Collateral Registry;
• upon termination of the security right, to return the asset to the grantor or release its control over the security; and
• to provide adequate proof to the debtor with regard to the securitisation of receivables that a security right has been created over the receivables.

Security over immovable property: A party can secure a debt by mortgage only if it (or the guarantor) is entitled to dispose of the immovable property for consideration.

The debtor bears the costs of registration of the mortgage.

5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?

The following considerations must be taken into account:

• The pace of registration is expedited due to the priority rule under Ethiopian law.
• Strict foreign currency rules regulate the use of foreign currency. If the creditor is a foreign entity, remittance of the security amount (in case of the debtor's default) is subject to the approval of the National Bank of Ethiopia.
• Notification and registration of secured interests are very important. The laws clearly provide that priority over secured interests is established by the date of registration of the secured interests in the relevant registers.

6 Guarantees

6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

There are two classes of guarantees in Ethiopia:

• those that are recognised under the law; and
• those that are only observed in practice and are not regulated by specific laws.

The main types of guarantees in Ethiopia are as follows:

• Personal guarantee: A contract between two parties (the guarantor and the creditor) under which the guarantor undertakes towards the creditor to discharge the debtor's obligations should the debtor fail to discharge it.
• Performance guarantee: A payment bond given on behalf of the debtor to the other contracting party to make good on any default by the debtor under the contract.
• Maintenance or defects liability bonds: Retained for a year to secure the maintenance of the work or, if the contractor is released, an unconditional guarantee which is valid for a year.
• Bank guarantee: Issued by a bank in favour of the beneficiary on behalf of the applicant, to effect payment if the applicant defaults in payment.
• Letter of credit: A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
• Corporate guarantee: An agreement under which a company agrees to be held responsible for fulfilling the duties and obligations of debtor to a lender should the debtor fail to comply with the terms of the debtor-lender contract.

6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?

The requirements for perfection of a guarantee are as follows:

• It must be express and not presumed. Accordingly, it is recommended that the guarantee be executed in writing.
• It must state the maximum amount guaranteed.
• The guarantee must be given with regard to a valid obligation.
• The guarantee must not exceed the amount owed by the debtor or have more burdensome terms.
• If the guarantee relates to immovable property, stamp duty of 1% must be paid before or upon signature of the guarantee instrument.
• The guarantee must be signed by the parties and notarised.

6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?

The following fees and taxes may arise from perfection or notarisation.

Perfection fees: A secured creditor or an authorised person must pay the fees for the following services:

• Initial registration of notice and extension:
• • Banks: ETB 100 for initial notice and ETB 50 for extension; and
  • Other persons: ETB 200 for initial notice and ETB 100 for extension.

Taxes: Stamp duty at a flat rate of ETB 5 is payable on all contracts and agreements concluded in Ethiopia.  In addition, 1% of the value of the debt guaranteed by the security deed is payable by the borrower on or before signing of the security deed. This does not apply in the case of security taken over movable property under the Movable Property Rights Proclamation.

Notary charges: The charge for notarisation of guarantee agreements in relation to immovable property is ETB 50.

6.4 What are the respective obligations and liabilities of the parties under the guarantee?

Guarantor:

• The guarantor is liable only with regard to the amount specified in the agreement of guarantee. If the creditor and the principal debtor increase the guarantor's liability after the instrument of guarantee has been executed, the guarantor's consent and the amendment of the guarantee agreement are required.
• If the debt bears interest, the guarantor is liable only for payment of interest within the limits of the maximum amount stated in the instrument of guarantee, unless agreed otherwise.
• The guarantor is liable, even beyond the maximum amount stated in the instrument of guarantee, for the cost of any actions brought against the principal debtor, provided that it receives sufficient notice thereof, enabling it to forestall such action by discharging the debt.

Creditor:

• If the guarantor has indicated the assets and supplied sufficient money for a claim by the creditor against the debtor , the creditor is answerable to the guarantor up to the value of the assets if the principal debtor becomes insolvent due to the creditor's failure.
• Where the primary obligation has fallen due, the guarantor may demand that the creditor sue the principal debtor within six weeks to enforce its right. If the creditor fails to diligently comply with this summons, the guarantor will be released.
• The creditor must hand over the documents of title to the guarantor and perform such formalities as will enable the creditor to exercise its remedy and realise the securities available to it.
• The creditor is obliged to inform the guarantor of the debtor's insolvency as soon as it learns of it. If it fails to do so, the creditor losses its rights against the guarantor for the amount of loss that has resulted from the insolvency.

Debtor:

• The debtor must indemnify the guarantor which has paid the creditor, regardless of whether the guarantee was given with or without the debtor's knowledge.

6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?

There is a shortage of foreign currency in Ethiopia. Accordingly, repatriation of the guaranteed amount may be delayed depending on the availability of foreign currency in the country at the time of the application for repatriation.

To address this problem, the government is considering providing a convertibility guarantee for public-private partnership projects.

7 Financial assistance

7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?

In this context, ‘financial assistance' is understood to mean loans, subsidies and grants.

In scenarios where the government is the borrower, the loan and any security must be approved by the House of People's Representatives. The federal government may grant subsidies to regional governments based on applications filed by the regional governments. The Ministry of Finance records and manages grants and aid provided to public bodies.

Loans issued to private entities in foreign currency are regulated by the National Bank of Ethiopia (NBE) and require the prior approval of and registration with the NBE. There are no regulatory requirements for the issue of grants to private parties.

These requirements and restrictions have no impact on secured finance transactions. Detailed requirements for loans granted to private parties are set out below.

Financial assistance by micro-finance institutions:

• Lending activity should follow prudent written lending standards approved and adopted by the board of directors.

• The approval of the board of directors is required.
• The total loans extended to one borrower at a time must not exceed 1% of the total capital of the micro-finance institution or 4% of the total capital of the micro-finance institution where the loans are extended to a group.
• The repayment period must not exceed 15 years for a housing loan or five years for any other loan.

Financial assistance by commercial banks:

• Lending activity should follow prudent written lending standards approved and adopted by the board of directors.
• The total loans advanced by a commercial bank to any one person must not exceed 25% of the total capital of the commercial bank.
• Where a loan is to be advanced or extended, the outstanding sum directly or indirectly provided to related parties must not exceed 15% of the total capital of the commercial bank.
• The restrictions on loan amounts are excluded where the loan is secured in full for a cash substitute or cash collateral.

Financial institutions may also have their own requirements in addition to those set forth under the law.

External loans: Where a loan is obtained from foreign sources, the approval of the NBE is required. The following information must be submitted to the NBE in seeking approval:

• the sum to be borrowed;
• the purpose of the loan;
• the rate of interest, the terms of repayment and other costs involved;
• the nationality, name and address of the lending person or institution;
• the relation between the borrower and lender; and
• the collateral or lien given.

8 Syndicated lending

8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?

The concept of a syndicated loan is recognised under Ethiopian law. This arrangement is possible where agents and trustees have undersigned for a predetermined obligation under the syndicated loan contract. Usually, local banks are involved in the transaction as trustees, due to the restrictions on foreign banks operating in Ethiopia.

8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?

No special requirements and restrictions apply to syndicated lending.

8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?

The key consideration is the capacity of the local bank that will act as the trustee, coordinating and managing the execution of the transaction and engaging with the borrower.

9 Taxes, charges and fees

9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?

Taxes: Stamp duty at a flat rate of ETB 5 is payable on all contracts and agreements concluded in Ethiopia. In addition, 1% of the value of the debt guaranteed by the security deed is payable by the borrower on or before signing of the security deed. This does not apply in the case of security taken over movable property under the Movable Property Rights Proclamation.

Notary charges: The charge for notarisation of guarantee agreements in relation to immovable property is ETB 50.

The fees do not vary depending on the nationality of the lender.

9.2 Are any exemptions or incentives available?

As an incentive for public-private partnership (PPP) projects, the government is considering providing government guarantees for the convertibility of the repayment amount for lenders on PPP projects.

The registration of initial notice for prior secured rights (ie, security rights that were established prior to the operation of the Collateral Registry Office), cancellation notices and amendments or updates to registration notices are free of charge.

9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?

There are no other significant costs to note. If the lender is a foreign entity, it will have the extra cost of legalising its documents in its country of origin.

9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?

There are no mitigating strategies with regard to the taxes and fees chargeable in the secured finance context.

10 Judicial enforcement

10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?

Creditors must enforce their security rights by applying to court. The exception is the foreclosure right provided to Ethiopian banks. The laws include special features regarding the enforcement of security rights, depending on the type of property.

Movable property: A secured creditor requires a court order to take possession of collateral, unless:

• the security agreement provides that the secured creditor is entitled to obtain possession of the collateral without applying to the court; or
• at the time the secured creditor attempts to obtain possession of the collateral, the grantor or any other person in possession of the collateral does not object.

A secured creditor whose rights are affected by the non-compliance of a third party is entitled to apply for relief to a court, including relief in the form of expedited proceedings.

Immovable property: Banks are permitted to sell by auction, after notice, the mortgaged collateral. However, other creditors must pursue enforcement action through the courts.

10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?

The timeframe for enforcement will depend on the method of enforcement – that is, self-enforcement or court proceedings. In case of the latter, it will also depend on other factors such as the workload of the court at the time of the application for enforcement. Therefore, there is no set enforcement period. However, in practice, enforcement can take from six months to two years.

Security on movable property: Upon default, the secured creditor is entitled to sell or otherwise dispose of, lease or license the collateral. The creditor may choose to dispose of the collateral through a public auction or other forms of sale, lease or license. The creditor must follow the following steps:

• The creditor must give 10 working days' notice of its intention to dispose of the collateral. However, the law provides for exceptions to which this notice period will not apply due to the nature of the collateral.
• If the creditor opts for a public auction, a notice should be published that sets out:
• • the time and place of the auction;
  • a detailed description of the collateral;
  • the estimated value of the collateral;
  • the terms and conditions of the sale; and
  • the encumbrance to which the collateral is liable.
• The sale will not happen until at least 15 days after the date on which the notice is affixed to the court compound or notification of the auction is publicised

If the highest bid at the auction is lower than the value specified in the notice, a second auction will be held. If no buyers attend the second auction, the secured creditor can acquire the collateral at the floor price of the first auction.

Security over immovable security:

• After obtaining a court decree for the delivery of immovable property, the property will be attached by a court order which prohibits the judgment debtor from transferring or charging the property.
• The general principle is for the sale to be effected through public auction. However, the court can authorise a private sale at the request of the judgment debtor and after hearing the decree holder.
• A notice of the auction must be published that sets out:
• • the time and place of the auction;
  • a detailed description of the collateral;
  • the estimated value of the collateral;
  • the terms and conditions of the sale; and
  • the encumbrance to which the collateral is liable.
• The sale will not happen until at least 30 days after the date on which the notice is affixed to the court compound or notification of the auction is publicised.
• If the highest bid at the auction is lower than the value specified in the notice, a second auction will be held. If no bidder attends the second auction, the court may authorise the decree holder to take possession of the collateral at its estimated value.

As an exception to the requirement to obtain a court order for an auction, banks that are registered in Ethiopia may enter into an agreement that authorises the creditor bank with which a property has been mortgaged and whose claim is not paid within the time stated in the contract to:

• sell the mortgaged property by auction upon giving prior notice of at least 30 days to the debtor; and
• transfer the ownership of the property to the buyer.

The steps for the auction are the same as outlined above.

10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?

No other considerations should be borne in mind, apart from what is stated in questions 10.1 and 10.2.

10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Direct agreements with contractual counterparties are not yet common in Ethiopia. However, in recent years we have seen a few direct agreements used in project finance transactions and in public-private partnership projects.

10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?

There are none.

11 Bankruptcy

11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

The general principle is that the rights of creditors must be respected in restructuring, reorganisation or bankruptcy proceedings. Creditors have a say regarding the plan and procedure of restructuring or reorganisation. Similarly, in bankruptcy proceedings, a majority vote of creditors is required for decisions to dispose of the debtor's property. Furthermore, creditors have a right to give their opinions and attend court proceedings relating to the bankruptcy procedure.

However, if the interest of a creditor is not the interest of the majority of creditors, there is a chance that a creditor will be impacted by the bankruptcy proceeding based on the interest of the majority of creditors.

11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

The period running from the cessation of payments as fixed by the court to the date of the commencement of proceedings is regarded as the ‘suspect period'. The duration of the suspect period is limited to a maximum of 18 months.

In reorganisation proceedings, antecedent transactions may be unwound for preference by the court at the request of the supervisor in the following cases:

• The creditor knew or should have known that the debtor was already in a situation of cessation of payments; and
• The act was detrimental to the estate or the payment was made in preference to other creditors.

In bankruptcy proceedings, the trustee in bankruptcy will take action to invalidate actions performed by the debtor during the suspect period prior to the declaration of bankruptcy if these actions were not invalidated by the reorganisation supervisor in the context of reorganisation proceedings. For the purposes of invalidation, the trustee in bankruptcy has the same powers as the supervisor in reorganisation.

11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?

The following entities are excluded from the bankruptcy regime:

• joint ventures without legal personality;
• craftsmen; and
• natural persons exercising independent professional activities.

12 Governing law and jurisdiction

12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Under Ethiopian law, the following laws govern security rights:

• the 1960 Civil Code of Ethiopia (Proclamation 195/1965);
• the Movable Property Security Right Proclamation (1147/2019);
• the Operationalisation of Movable Collateral Registry Directive (MCR/01/2020);
• the Warehouse Receipts System Proclamation (372/2003); and
• Capital Goods Leasing Business Proclamation 103/1998 and its amendment, Capital Goods Leasing Business Proclamation 807/2013;

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

A choice of foreign law or jurisdiction is valid and enforceable if agreed by the parties. There are no restrictions with regard to submission to jurisdiction provisions that operate in favour of one party only.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Yes.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

Yes, foreign judgments and arbitral awards are enforceable, provided that certain conditions are fulfilled. The Civil Procedure Code provides detailed rules on the enforcement of foreign judgments.

Foreign court judgments are enforceable in Ethiopia subject to the fulfilment of the following conditions:

• The execution of Ethiopian judgments is allowed in the country in which the judgment to be executed was issued;
• The judgment was issued by a court duly established and constituted;
• The judgment debtor was given the opportunity to appear and present its defence;
• The judgment to be executed is final and enforceable; and
• Execution is not contrary to public order or morals.

With regard to the enforcement of foreign arbitral awards, Ethiopia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Hence, it is bound to respect and enforce foreign arbitral awards as if they were domestic arbitral awards, although the declarations and reservations that Ethiopia entered when ratifying the convention must be observed.

A foreign arbitral award issued in a country that is a signatory to the New York Convention is enforceable in Ethiopia if the following conditions are fulfilled:

• The foreign arbitral award is commercial in nature; and
• The country in which the arbitral award was issued ensures reciprocity.

This applies only to arbitration agreements concluded and arbitral awards rendered after the date of Ethiopia's accession to the convention. Ethiopia has also declared that:

• the convention will apply to differences arising from legal relationships, whether contractual or not, which are considered commercial under Ethiopia; and
• it will apply the New York Convention only to awards issued in the territory of another contracting state.

An award issued in a country that is not a signatory to the New York Convention will be enforced if the following conditions are fulfilled:

• Reciprocity is ensured;
• The award was issued pursuant to a regular arbitration agreement;
• The parties had equal rights to appoint the arbitrators and were given the opportunity to attend the proceedings;
• The tribunal was regularly constituted;
• The subject matter of the dispute is arbitrable in Ethiopia or is not contrary to public order or morals; and
• The award is enforceable.

13 Trends and predictions

13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The legislative landscape has evolved considerably over the last two years or so, and various changes are now coming into effect. They include:

• a new capital markets proclamation which aims to support the development of the national economy by mobilising capital, promoting financial innovation and sharing investment risks;
• the amendment of the Commercial Code; and
• the establishment of the Collateral Registry Office under the Movable Property Security Right Proclamation, which will pave the way for effective use of movable property as collateral for financing.

No further changes or new laws are expected in the coming 12 months.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?

Our top tips are as follows:

• Fulfil all validity requirements of contract; and
• Comply with the perfection requirements of each type of security to the fullest extent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.