Unlocking Access to Finance

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Increasing access to finance for micro, small and medium scale enterprises will spur economic activities and bring about sustainable growth, writes Obinna Chima

Micro, small and medium scale enterprises (MSMEs) play a major role in most economies, particularly in developing countries. In fact, MSMEs contribute up to 45 per cent of total employment and up to 33 per cent of national income (GDP) in emerging economies, according to a report by the World Bank.

Estimates also show that 600 million jobs would be needed in the next 15 years to absorb the growing global workforce, mainly in Asia and sub-Saharan Africa. 
However, access to finance is a key constraint to MSMEs’ growth and without it, many operators have been stagnating.

Overall, the World Bank report indicated that approximately 70 per cent of all micro, small and medium scale enterprises in emerging markets lack access to credit. While the gap varies considerably between regions, it’s particularly wide in Africa and Asia.
That is why improving access to finance for MSMEs and finding solutions to unlock sources of capital is crucial to enable their businesses grow and provide the needed jobs.

National Collateral Registry

In pursuant of the Central Bank of Nigeria’s (CBN) mandate on sustainable economic inclusive growth and financial inclusion, the apex bank in collaboration with the International Finance Corporation (IFC) had established the National Collateral Register (NCR).

The NCR is a financial infrastructure that seeks to deepen credit delivery to MSMEs through enhanced acceptability of movable assets – equipment, machinery, vehicles, Keke – NAPEP, crops, livestock, account receivables, inventories, and jewelry – as collateral for loans by financial institutions.

It is a registry where security interests in moveable assets are registered after being used as collateral to obtain facilities from financial institutions.

NCR allows lenders to assess their priority interest in potential claims against particular collateral.

The objective, it was learnt, is to enhance financial inclusion in Nigeria, stimulate responsible lending to MSMEs, facilitate access to credit secured with movable assets, perfect security interests in movable assets, facilitate realisation of security interests in movable asset.

The key deliverable of the registry is to promote the acceptance of movable asset as collaterals for loans and contribute to economic growth and development of the country.

It was signed into law in 2017 by Vice President Yemi Osinbajo, during the period he acted as president.

Presently, a cumulative of 154,827 MSMEs have used movable assets valued at N1.561 trillion to obtain loans from financial institutions since the NCR was passed into law. The latest NCR report obtained by THISDAY had showed that a breakdown of the amount recorded between January 1, 2017 and December 19, 2018, put the value of the assets at N1.209 trillion; $1,142, 389,799.12 (N349,571,278,530.72) and €6,080,004.36 (N2,121,921,521.64).

The report also revealed that of the 154,827 MSMEs that used their movable assets to obtain loans from financial institutions, 22,251 were female-owned MSMEs.

It stated, “Considerable number of borrowers secured credit from financial institutions in 2018 using their movable assets as collateral. The high number of borrowers that secured credit in 2017 is attributable to the high participation of smallholder farmers under the CBN Anchor Borrower’s Programme using cross-guarantee as collateral.

“During the year under review, there was an upsurge of lending using movable assets as collateral. This is attributable to the increase in the number of microfinance banks on the NCR portal as well as increased participation of deposit money banks and non-bank financial institutions. Out of the total amount of N1,209,381,006,933. 90, a sum of N43,618,262,792.17 went to female MSMEs.”

In addition, the report showed that a cumulative of 16,349 searches were conducted by both financial institutions and the public on the NCR portal.

Also, there was an upsurge of searches conducted by financial institutions in 2018 due to their increased participation in the movable asset lending regime and continuous sensitisation to the users to ensure they conduct searches to determine the level of encumbrances before undertaking any financial transaction.

Commenting on the milestone recorded in 2018, the report pointed out that during the year, 411 microfinance banks registered on the NCR portal as a result of intensive sensitisation campaign on the operations of the register carried out across the six geo-political zones of the country as well as other collaborative strategic enlightenment programmes.

“During the period under review, the number of financial institutions that registered on the National Collateral Registry portal increased by 343 per cent, when compared with the 2017 figure which was 103 financial institutions. This was the result of the various aggressive education and awareness campaign on secured transactions in moveable assets conducted under the National Action Plan.

“Also, during the period under review, the number of registered financial institutions that registered financing statements on the NCR portal increased by 89 per cent when compared with the 2017 figure which was 36 financial institutions. This was the result of the various aggressive education and awareness campaign on secured transactions in moveable assets conducted under the National Action Plan,” it stated.

Some of the challenges faced included paucity of funds for sensitising the judiciary and Nigeria police on the legal implications of the STMA Act, 2017; the need for a driver to move NCR staff to strategic meetings and answer to financial institutions complaints where necessary considering the present location of the office; and low usage of the Collateral Registry System especially bank and reluctance of financial service providers to appreciate the benefits of Asset-Based Lending, among others.

CBN Governor, Mr. Godwin Emefiele, had expressed satisfaction when the  Secured Transactions in Movable Assets Act (otherwise known as National Collateral Registry Act) was signed into law by Osinbajo, saying it would help to expand access to finance for MSMEs in the country.

This, he said, was one of the cardinal objectives of the development finance function of the CBN.

On the benefits of the National Collateral Registry, Emefiele explained that when he assumed the position of CBN Governor on June 3, 2014, one of his vision statements was to ensure improved access to credit to MSMEs.

As part of efforts to achieve this, he disclosed that the CBN had to work with the IFC, an arm of the World Bank, to sponsor the bill on the Collateral Registry.

He pointed out that the NCR provides a legal framework under which banks can lend money to the SMEs.

“Banks would naturally not lend without taking collateral because of the perceived risk of either non-performance arising from business failure. So, because the banks are in business not to lend their own money, but depositors’ money, they would want to be sure that whatever money that they lend to any person or corporate entity, is secured.

“But some SMEs don’t have fixed assets like buildings or land that banks can hold on to as collateral in the event of business failure. So the idea of movable collateral makes it easy to say, if you have a car, you can register it through the registry and the bank would take the car as collateral and register it in the registry.

“The registry would assign certain code numbers, which gives that bank exclusive charge over that car, so that in case there is failure, they can possess the car and with the legal framework in place, they would be able to sell the car to realise what they lent out as loan.

“Similarly, if you are a hairdresser, the bank can take the hairdressing equipment, if you are a mechanic, they can take your mechanical tools, or any kind of business,” he explained.

To this end, Emefiele expressed optimism that with this law, Nigerian lenders would be further encouraged to loan to the SMEs, saying that the CBN in collaboration with the banks would soon start creating awareness on the benefits of the National Collateral Registry.

He, however, pointed out that the central bank and financial institutions under its supervision would raise the level of awareness on the NCR.

“I believe once that is done, we would see the sustainable and inclusive growth that we are looking for. In Nigeria, we have close to 40 million SMEs. So, for us to be able to provide jobs for people, we need to encourage the SMEs to be able to access finance,” he added.

Ensures Transparency

According to a World Bank report, transparency and priority are the core elements that make the existence of a collateral registry relevant and a sine qua non for SME financing.

It pointed out that there are two perspectives when financing the establishment or expansion of a SME—that of the debtor and that of the creditor.

On the one hand, companies require affordable credit—greater availability, an extended repayment period and lower interest rate. On the other hand, lenders must absorb the cost of capital, loan transaction costs and the risk of a non-performing loan. SMEs, in particular, often lack adequate credit history and proof of profitability.

In SME-intensive sectors such as agriculture, for example, entrepreneurs face particular challenges such as weather risks and market fluctuations. For this reason, banks require that collateral—ideally for the bank in the form of immovable property—is provided as a guarantee, the World Bank stated.

Nevertheless, the multilateral institution noted that efficient, secured transactions legal frameworks that allow for movable property to be recorded in collateral registries can support an increase in lending.

Furthermore, studies showed that banks tend to increase lending following reforms to collateral laws; this is especially important in emerging economies where information asymmetries prevail.

“Registration that is easy, quick and inexpensive encourages parties to reveal transactions that they otherwise may have concealed. Documentation may unnecessarily complicate the creation of the security right, particularly if the document requests payments and the parties enter into small repeated actions,” it added.

Therefore, the introduction of a new collateral registry in the Nigerian financial system is expected to result in a significant economic impact in bank financing as studies had shown that, apart from increased access to credit, interest rates may drop and repayment periods can be extended owing to this initiative.