Making the most of Collateral Registry and Credit Reporting
There is no controversy as to whether finance is a major constraint facing the MSME sector. It is settled. What probably may be at issue is the somewhat academic argument as to the ranking of finance among other known constraints of the sector. Finance may be just one of the challenges of the sector but it is a very important one. The role of finance in the well-being of any organisation cannot be overemphasised. It is probably the larger than life image of finance as a challenge of MSMEs that has put it in the forefront of the search for solutions. That search has led Nigeria to dump a lot of funds in the banks for onlending to informal sector operators, which sadly they are practically unable to access. It has also culminated in the recent passing of some very important laws, to address the issue of movable assets as security for bank lending.
Research findings indicate that in the developing world, about 80 percent of the assets of business enterprises are typically in the form of movable assets with only about 20 percent in immovable property. Lenders prefer immovable assets because as their name indicates, movable assets are often in motion and do actually move away from the lenders’ view and control. Even inventory financing under such arrangements, such as stock hypothecation, are still a weak security option to lenders. Financial institutions are therefore not very keen to do business with MSMEs on the security of movable assets. In the more advanced economies, like the USA, the asset composition of business entities is more in favour of immovable property and hence more attractive to lenders.
The passing into law of the Collateral Registry Act, 2017 and the Credit Reporting Act, 2017, are clear silver linings in the horizon of MSMEs in Nigeria. These are, without any doubt, people-oriented laws that speak well of the National Assembly. These laws will surely fill the long standing gap created by the fact that operators in the informal sector have little or no bankable assets. MSMEs have always been confronted with the question: “Do you have any collateral to secure the loan?” And the answer has almost always been no because they have little or no assets. And when the borrower enthusiastically says yes, the reality is always the opposite as much of what they call security is not, in the language of bankers, bankable security. So the yes turns to no at the end of the day, and the loan request is rejected. Studies in Nigeria indicate that over 60 percent of polled banks were unwilling to finance the sector and loan application rejection rate is as high as 90 percent for some banks.
This conduct of banks is not without foundation. They are, under the Banks and Other Financial Institutions Act, 2004, prohibited from making unsecured loans, unless authorised by the bank’s rules. So it’s not always a question of fear of the unknown regarding the ability of the borrowers to pay back. It is actually more of the fear of the known laws against unsecured loans. The outcome is that inadequate funding has coalesced with other challenges to prevent operators in the informal sector from acting legally and efficiently. They are therefore forced to perform below capacity. There is therefore a genuine challenge to be resolved in that regard. The two bills recently signed into law by the energetic Acting President is cause for optimism.
The informal sector is often the only hope of those structured out of the economic mainstream to the periphery. Most people there are victims of negative circumstances. They are mostly people who set out to be part of the organized formal economy but the stagnant formal sector spewed them out. They are often unwilling entrepreneurs who have no alternative but fight it out. Most of the boys we see in Ladipo, Idumota and Sabon Gari markets, to mention a few, parading university degrees and selling second hand items, are victims of an unjust economic system that has rejected them. Therefore, a large informal sector is not a good thing. It is a mark of the failure of governance.
Informality could therefore be a measure of the level of economic injustice and the extent to which self-help has become a norm in a society. It connotes a largely illegal and unorganised environment. It also indicates the extent of such ills as tax evasion and the absence of law and order. Thus, a large informal sector is symbolic of large volumes of lost taxes, fees and other incomes that would ordinarily accrue to government. This is the case of Nigeria where the informal sector is large, contributing about 50 per cent of the GDP and over 70 per cent of economic activity.
The bulk of the assets of MSMEs are in the form of movable property or chattels – furniture and fittings, motor vehicles, animals and other equipment. Many lenders have suffered losses by lending on the security of these chattels because they actually do move. Imagine when cows are pledged as security for loans to farmers. The least one can expect is to see the cows stray away, especially in a primordial environment like Nigeria where cows are said to come from far away countries, like Mali and Burkina Faso, to graze on peoples’ farms, on the excuse of ECOWAS treaty on “free movement of cows” – one of the big fallacies of the current debacle of herdsmen in Nigeria. Therefore, reforming secured transaction laws, to make movable assets to be less mobile, will help MSMEs to access finance.
A good way to do this is by identifying such assets and registering them and storing accessible information on them as the Collateral and the Credit Registries will do. The passage of these laws is just the beginning, and as I said may be mere silver lining. Whether it rains or shines will depend on what happens to the silver lining. It’s our responsibility. The next and very important phase is to make the laws work for Nigerians.
In the coming instalments, we shall draw from the experiences of those that have successfully implemented Collateral Registries and share the knowledge with our readers. For starters, let all operators read the laws or get help from their lawyers and bankers to be sure we are all on the same page. I also appeal to my learned colleagues and bankers to put their learning on this matter freely at the disposal of MSMEs as a national service, through free bulletins and write-ups.
Emeka Osuji