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

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$ 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 Capital Stock of Firms Collateral Taken by FIs 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

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 Capital Stock of Firms Collateral Taken by FIs 8

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

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 10

How does IFC implement this work? 11

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

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) 13

Africa portfolio and early results 14

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, ) Collateral Registry: New on-line registry, 2012 Next Steps: Enactment of revised B&L Act, 2013 Ongoing awareness and capacity building 15

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 17 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 20

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

STAKEHOLDER FRAMEWORK

THANK YOU! 23 Reginald Chijioke Nworka IFC Global Secured Transactions & Collateral Registries Program