Asset registry to plug $100bn MSME financing gap

In another move to enhance financial inclusion and improve the flow of credit to the Micro Small and Medium Enterprise sector, the CBN, in a collaboration with the International Finance Corporation plans to kick off the Collateral Registry for moveable assets.

Following its raging success in other economies, a collateral registry for Moveable asset, is seen as the missing piece needed for the MSME sector to take off.

A moveable asset, as opposed to a fixed asset, is an asset that is movable or portable. It includes possessions like vehicles, power generators, and personal belonging like jewellery and mobile devices. It also refers to less tangible assets like shares of stock and accounts receivable.

“Movable assets often account for most of the capital stock of micro, small, and medium-size enterprises. As a result, movable assets are the main type of collateral that MSMEs, especially those in developing countries, can pledge in order to obtain bank financing”, says Maria Peria, Research Manager of the Finance and Private Sector Development at the World Bank. However, the continued insistence of lending institutions on fixed assets have led to the exclusion of the MSME sector from formal financing, many of which are embedded in the informal sector.

For the use of moveable assets to be effective and risk-free, a collateral registry is needed. A collateral registry is a single central electronic database where all moveable assets pledged as collateral are registered, in order to avoid the re-pledging of those assets for which there are already existing liens.

“With the launch of the collateral registry and the use of moveable assets, the Nigerian MSME will explode”, said Ubong Awah, the Country Project Manager of the IFC-led initiative in an interview with BusinessDay.

Following the launch of a collateral registry in Ghana by the Bank of Ghana, the MSME sector gained access to US$3.5 billion worth of financing.

To date, 60,000 businesses and 224,000 people have benefited from the project. In China where moveable asset and collateral registry was developed as a way to boost the economy after the Asian economic crises, a total of US$3.5 trillion was disbursed to the MSME sector in five years. Also, in Vietnam, a total of 54,000 business have benefited from US$600 billion financing since itsinception in 2012.

In Nigeria, the MSME sector accounts for about 90 million jobs in the economy. Of the entire sector, less than 15% of MSMEs have access to finance. Lack of access to financing, most notably working-capital financing, has led to the crimping of sector growth, and a loss in latent innovation, creativity and productivity. This is in spite of the amount of credit made available via government and CBN schemes. The N200 billion SMEs Credit Guarantee Scheme (SMECGS) which was established to encourage banks to lend to productive sectors of the economy, achieved less than 60 percent utilization, thereby defeating its purpose.

According to an earlier EFInA study, only about 12 percent of MSMEs have been able to borrow from the bank, while more than 80 percent have had to borrow from friends and family.

Dead Assets

“A lot of these MSMEs are in possession of ‘dead assets’, with this project, we are trying to make those dead assets useful while providing them with financing” said the project manager. Dead assets refers to valuables that can be monetized in the loan procurement process.

“In addition, this project will lead to the deepening of the insurance sector, because all potential moveable assets will have to be insured before being registered in the collateral registry”, he further said.

Other key measures to further institute informal sector lending will include enacting a Lending Act by the National assembly. In Ghana, a Borrowers and Lenders Act was established in 2008. Education and awareness for both the bankers and MSME operators will also be required.

A key reason why the majority of MSMEs have been left out of the formal financing cycle is the insistence on fixed asset collateral by lending agencies like the banks.

“We need to fix the structural issues around retail lending and we will see capital flowing in that direction”, says a high-ranking banking sector executive that prefers not to be named. “Nigerian banks have little reason to lend because of the risk”.

Nigerian banks have been finding it hard to de-risk retail lending to individuals and MSMEs, but the sector still remains inherently risky.

The biggest causes of risk identified are a lack of collateral from borrowers, and asymmetric information — where a retail borrower doesn’t disclose sufficient financial information and banking history, which can sufficiently put a bank at risk.

To solve this structural issue, banking sector analysts are putting their faith on a movable asset / collateral registry, efficient and timely dispute resolution and a comprehensive national identification infrastructure.

EDOZIE IFEBI