IFC's presentation on Promoting SME Finance - August 2013

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

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

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

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

6. 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

7. •SME FINANCE GAP AND COLLATERAL GAP
44%
34%
22%
Vehicles/machinery/equipment
Accounts Receivable
Land / Real Estate
73%
27%
Land / Real Estate Movable property
•CapitalStockofFirms
•CollateralTakenbyFIs
•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

8. Credit Application Rejected -
Insufficient Collateral
0%
10%
20%
30%
40%
50%
60%
70%
80%
Africa
East
Asia
ECA
Latin
America
South
Asia
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

9. •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

10. 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
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11. How does IFC
implement this
work?
11

12. 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
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13. 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)
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14. Africa portfolio
and early results
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15. 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

16. 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
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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
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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

18. Impact of reforms
in other regions
18

19. 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

20. The Way Forward For Nigeria
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21. 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

22. 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

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