Promoting SME Finance: A case for

Developing Secured Transactions and a Collateral

Registry for NigeriaReginald 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

VehiclesIndustrial 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/equipmentAccounts ReceivableLand / Real Estate

73%

27%

Land / Real Estate Movable property•Ca

pita

l Sto

ck o

f Fir

ms

•C

olla

tera

l Tak

en b

y FI

s

• 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

C r e d i t A p p l i c a t i o n R e j e c t e d - I n s u f f i c i e n t C o l l a t e r a l

0 %1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %

Afr

ica

Ea

st

As

ia

EC

A

La

tin

Am

eri

ca

So

uth

As

ia

D i d N o t A p p l y : C o l l a t e r a l R e q u i r e m e n t s t o o H i g h

0 %

5 %

1 0 %

1 5 %

2 0 %

2 5 %

3 0 %

3 5 %

A f r ic a E a s t A s ia E C A L a t inA m e r ic a

S o u t hA s ia

Credit Application Rejected: Insufficient

Collateral

Did not apply: Collateral Requirements Too High or Thought Application Would

be Rejected

Collateral GapLack of adequate

collateral

Source: World Bank Enterprise Surveys

Mismatch between assets owned by companies and

collateral required

44%

34%

22%

Vehicles/ma-chinery/equip-ment

73%

27%

Land / Real Estate

Capital Stock of Firms

Collateral Taken by FIs

8

• BENEFITS OF A MODERN SECURED TRANSACTIONS SYSTEM

9

• INCREASES ACCESS TO CREDIT REDUCING THE RISK OF CREDIT

• REDUCES THE COST OF CREDIT

• PROMOTES CREDIT DIVERSIFICATION

• INCREASES MARKET COMPETITION

• - Underserved SMEs

and women entreprene

urs• - Promotes

risk management, prudent

lending

• - Better interest

rates• - Move

from informal to

formal financing• - Cost

savings for businesses

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 RegistryNo 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

• LEGAL AND REGULATORY FRAMEWORK

• CREATION OF ELECTRONIC REGISTRY

• BUILDING THE CAPACITY OF STAKEHOLDERS• MONITORING IMPACT

• 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/awar

eness• 5. Launching

of registry

1 2

4 312

Current project Portfolio

AFRICAGhanaRwandaOHADA South Sudan

Sierra Leone

Liberia

MENAAfghanistan

JordanLebanonPalestineMoroccoEgyptYemenUAEAMF

EAST ASIA & PACIFICChinaLao PDRMongoliaPhilippines

Vietnam

SOUTH ASIA

Sri LankaNepalIndia

ECAAzerbaijan

BelarusMoldovaTajikistanUzbekistan

LACColombiaHaitiCosta Rica

PIPELINE

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

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Africa portfolio and early

results

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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

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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

• LEGAL AND REGULATORY FRAMEWORK

• CREATION OF ELECTRONIC REGISTRY

• BUILDING THE CAPACITY OF STAKEHOLDERS• MONITORING IMPACT

• 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/awar

eness• 5. Launching

of registry

1 2

4 321

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 NworkaIFC Global Secured Transactions &

Collateral Registries ProgramRnworka@ifc.org