Promoting SME Finance:

A case for

Developing Secured Transactions

and a Collateral Registry for Nigeria

Reginald Chijioke Nworka Abuja, Nigeria

August16th, 2013

1. What is a Secured Transactions System?

OUTLINE

2

2. Why is it Important for Nigeria?

3. Current State of Secured Transactions in Nigeria and

Relevant Stakeholders

4. Potential Impact Based on Results in Other Jurisdictions

4. Proposed Next Steps for Nigeria

Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumers credit

Bank Accounts Inventory and raw goods

Vehicles Industrial and agricultural

equipment Durable consumer

goods Agricultural products (crops,

livestock, fish farm)

Intellectual Property

rights

Accounts receivable and

secured sales contracts

What is a Secured Transactions System?

3

Why is secured transactions

important for Africa and Nigeria?

4

SME FINANCE GAP IN SUB-SAHARAN AFRICA

Source: McKinsey & Co. Global Financial Inclusion Practice

SME Finance Gap

Between US$ 140-170 Billion

5

SME Finance Gap CGAP/World Bank– Only 5% of SMEs Have Access to a Loan

70% of SMEs were denied financing when applying to a loan

80% of SMEs did not apply for financing but would like to have a

loan/line of credit

•% of Firms Using Banks to Finance Working capital

•SME FINANCE GAP AND COLLATERAL GAP

44%

34%

22%

Vehicles/machinery/equipment

Accounts Receivable

Land / Real Estate

73%

27%

Land / Real Estate Movable property

•C

apit

al Sto

ck o

f Fir

ms

•Co

lla

tera

l Ta

ke

n b

y F

Is

•Source: World Bank Enterprise Surveys

•SME Finance Gap

•MISMATCH BETWEEN ASSETS OWNED BY COMPANIES

AND COLLATERAL REQUIRED

• IN NIGERIA, AROUND US$ 62 BILLION

•Source: IFC-McKinsey

Credit Application Rejected -

Insufficient Collateral

0%

10%

20%

30%

40%

50%

60%

70%

80%

Afr

ica

Ea

st

Asi

a

EC

A

La

tin

Am

eri

ca

So

uth

Asi

a

Did Not Apply: Collateral

Requirements too High

0%

5%

10%

15%

20%

25%

30%

35%

Africa East Asia ECA Latin

America

South

Asia

Credit Application Rejected:

Insufficient Collateral

Did not apply: Collateral

Requirements Too High or Thought

Application Would be Rejected

Collateral Gap

Lack of adequate collateral

Source: World Bank Enterprise Surveys

Mismatch between assets owned by

companies and collateral required

44%

34%

22%

Vehicles/machinery/equipment

73%

27%

Land / Real Estate

Capital Stock of Firms Collateral Taken by FIs

8

•BENEFITS OF A MODERN SECURED TRANSACTIONS SYSTEM

9

• PROMOTES CREDIT DIVERSIFICATION

• INCREASES MARKET COMPETITION

• REDUCES THE COST OF CREDIT

• INCREASES ACCESS TO CREDIT REDUCING THE RISK OF CREDIT

- Underserved SMEs and women entrepreneurs

- Promotes risk management, prudent lending

- Better interest rates

- Move from informal to formal financing

- Cost savings for businesses

- Credit risk diversification: immovable and movable

- Sector diversification in the portfolio

- Development of industries (factoring and leasing)

- NBFIs

Why are financial institutions not lending, taking movable

property as collateral?

Restrictions on types of

assets

Lack of clear creditor

priority

Enforcement issues

Lack of Adequate Legal

Framework Lack of Registry of

Security Interests in

Movables

Dysfunctional Registry

No Registry

Lack of publicity

No transparency

Have never done that

type of financing

Do not have the staff

with skills

Lack of Know How on

Movable Asset Lending

Not their type of business

No competition in the

lending markets

Revenue from other

sources (TB)

Not Interested

10

How does IFC

implement this

work?

11

Business and delivery model

• BUILDING THE CAPACITY OF STAKEHOLDERS

• MONITORING IMPACT

• CREATION OF ELECTRONIC REGISTRY

• LEGAL AND REGULATORY FRAMEWORK

1. Create Committee

2. Draft new Secured Transactions Law

3. Awareness

4. Submit Law to Parliament

5. Draft registry regulations

1. Determine Government Agency to Host Registry

2. Develop Technical Specifications

3. Hardware and Software Procurement

4. Training/awareness

5. Launching of registry

1. Training and awareness to main stakeholders (both public and private sector) on the new system, including law and registry

2. Training on movable asset financing for Financial Institutions

1. Develop monitoring and evaluation plan including baseline information

2. Conduct periodic monitoring of impact through registry indicators and surveys

1 2

4 3 12

Current project Portfolio

AFRICA

Ghana

Rwanda

OHADA

South Sudan

Sierra

Leone

Liberia

MENA

Afghanistan

Jordan

Lebanon

Palestine

Morocco

Egypt

Yemen

UAE

AMF

EAST ASIA & PACIFIC

China

Lao PDR

Mongolia

Philippines

Vietnam

SOUTH ASIA

Sri Lanka

Nepal

India

ECA

Azerbaijan

Belarus

Moldova

Tajikistan

Uzbekistan

LAC

Colombia

Haiti

Costa Rica

PIPELINE AFRICA (Nigeria, Guinea, Coted’Ivoire, Togo, Zambia)

13

Africa portfolio

and early results

14

Key results (as of Dec. 2012):

More than 45,000 loans registered

More than US$6 billion in financing using

movable assets as collateral to

- SMEs (21%)

- Micro enterprises (65%)

- Women entrepreneurs (70% of

micro loans)

Movable Collateral:

- Inventory & receivables (24%)

- Motor vehicles (17%)

- Household goods (17%)

GHANA -Secured Transactions Reform

Project components:

1) Legal Framework:

• Borrowers and Lenders Act, 2008

• Registry regulations, 2012

2) Collateral Registry:

• New on-line registry, 2012

Next Steps:

• Enactment of revised B&L Act, 2013

• Ongoing awareness and capacity

building

15

More than 100 local SMEs have received more than US$ 10 million.

Created hundreds of new jobs.

SMEs use movable assets (contracts, receivables, equipment) as

collateral

No defaults in the 30 months that program has been operating

GHANA - Impact on SMEs: A practical case

CAL BANK: Purchase Financing Scheme for Gold Mining

Developed a local supply chain for big mining

corporations, through local SME service providers

16

LIBERIA -Secured Transactions and Collateral Registry Project

Strong Institutional Support:

Central Bank of Liberia

Legal Framework:

New Secured Transactions Law, enacted

in 2010 (Commercial Code)

Registry regulations approved

Next Steps:

Registry design and development

Communications & Public Awareness

Training and capacity building

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Context:

Average NPL rates at 23.6%

Lack of access to finance for

enterprise development (35% of

firms identify it as a major

constraint)

Only 14% of firms have a

loan/credit line

Impact of reforms

in other regions

18

Impact of Secured Transaction Reform in Asia

and Latin America

19

MEXICO Law reform and new centralized online registry (October 2011)

Over 125,000 loans have been registered – 45% to the agricultural sector

and 90% to SMEs

Businesses have saved US$3.8 billion in fees because the registrations

and searches are free

HONDURAS Law reform enacted (based on OAS Model Law) and new centralized online

registry (March 2011)

Introduced extrajudicial enforcement as result of the reform

More than 12,000 loans registered, mostly for SMEs

CHINA Law reform (2007) and new centralized online registry for accounts

receivables and leasing (2008)

Project has led to more than US$ 3.5 trillion in financing secured with

receivables, mostly to SMEs (60%)

Development of the factoring and leasing industries

The Way Forward For Nigeria

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Business and delivery model

• BUILDING THE CAPACITY OF STAKEHOLDERS

• MONITORING IMPACT

• CREATION OF ELECTRONIC REGISTRY

• LEGAL AND REGULATORY FRAMEWORK

1. Create Committee

2. Draft new Secured Transactions Law

3. Awareness

4. Submit Law to Parliament

5. Draft registry regulations

1. Determine Government Agency to Host Registry

2. Develop Technical Specifications

3. Hardware and Software Procurement

4. Training/awareness

5. Launching of registry

1. Training and awareness to main stakeholders (both public and private sector) on the new system, including law and registry

2. Training on movable asset financing for Financial Institutions

1. Develop monitoring and evaluation plan including baseline information

2. Conduct periodic monitoring of impact through registry indicators and surveys

1 2

4 3 21

STAKEHOLDER FRAMEWORK

DONOR COMMUNITY

(DFID, IFC/WBG)

CENTRAL BANK OF NIGERIA

FINANCIAL INSTITUTIONS, MFIs, NBFIs

- CORPORATE AFFARIS COMMISSION- FEDERAL MINISTRY OF FINANCE- FEDERAL MINISTRY OF JUSTICE

BUSINESSES (CORPORATES, MSMEs, INDIVIDUAL ENTREPRENEURS), BUSINESS ASSOCIATIONS, CHAMBERS OF

COMMERCE, INDUSTRY ASSOCIATIONS, CONSUMERS

THANK YOU!

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Reginald Chijioke Nworka

IFC Global Secured Transactions & Collateral

Registries Program

Rnworka@ifc.org