Promoting SME Finance : A case for Developing Secured Transactions and a Collateral Registry for Nigeria

1. Promoting SME Finance: A case for Developing Secured Transactions and a Collateral Registry for Nigeria Reginald Chijioke Nworka Abuja, Nigeria August16th, 2013

2. OUTLINE 1. What is a Secured Transactions System? 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

3. What is a Secured Transactions System? Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumers credit Accounts receivable and secured sales contracts Intellectual Property rights Inventory and raw goods Bank Accounts Durable consumer goods Industrial and agricultural equipment Agricultural products (crops, livestock, fish farm) Vehicles

4. Why is secured transactions important for Africa and Nigeria?

5. SME Finance Gap Between US$ 140-170 Billion SME FINANCE GAP IN SUB-SAHARAN AFRICA Source: McKinsey & Co. Global Financial Inclusion Practice

6. 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 SME Finance Gap % of Firms Using Banks to Finance Working capital

7. SME FINANCE GAP AND COLLATERAL GAP • IN NIGERIA, AROUND US$ 62 BILLION SME Finance Gap Source: IFC-McKinsey MISMATCH BETWEEN ASSETS OWNED BY COMPANIES AND COLLATERAL REQUIRED Capital Stock of Firms Collateral Taken by FIs Source: World Bank Enterprise Surveys

8. Collateral Gap Mismatch between assets owned by companies and collateral required Lack of adequate collateral Capital Stock of Firms Collateral Taken by FIs Credit Application Rejected: Insufficient Collateral Did not apply: Collateral Requirements Too High or Thought Application Would be Rejected Source: World Bank Enterprise Surveys

9. BENEFITS OF A MODERN SECURED TRANSACTIONS SYSTEM

10. Why are financial institutions not lending, taking movable property as collateral? Lack of Adequate Legal Framework Lack of Registry of Security Interests in Movables Lack of Know How on Movable Asset Lending Not Interested Not their type of business No competition in the lending markets Revenue from other sources (TB) Have never done that type of financing Do not have the staff with skills Dysfunctional Registry No Registry Lack of publicity No transparency Restrictions on types of assets Lack of clear creditor priority Enforcement issues

11. How does IFC implement this work?

12. Business and delivery model 1 2 4 3

13. Current project Portfolio EAST ASIA & PACIFIC China Lao PDR Mongolia Philippines Vietnam MENA Afghanistan Jordan Lebanon Palestine Morocco Egypt Yemen UAE AMF LAC Colombia Haiti Costa Rica ECA Azerbaijan Belarus Moldova Tajikistan Uzbekistan SOUTH ASIA Sri Lanka Nepal India AFRICA Ghana Rwanda OHADA South Sudan Sierra Leone Liberia AFRICA (Nigeria, Guinea, Coted’Ivoire, Togo, Zambia) PIPELINE

14. Africa portfolio and early results

15. 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 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%)

16. 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 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

17. 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 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

18. Impact of reforms in other regions

19. Impact of Secured Transaction Reform in Asia and Latin America 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

20. The Way Forward For Nigeria

21. Business and delivery model 1 2 4 3

22. STAKEHOLDER FRAMEWORK

23. THANK YOU! Reginald Chijioke Nworka IFC Global Secured Transactions & Collateral Registries Program Rnworka@ifc.org