by Dipo Osho
Nigeria is an entrepreneurial economy with an estimated 37 million micro, small and medium size companies (MSME) contributing over 48% to the GDP, employing over 60 million Nigerians and contributing over 7% to exports according to the National Bureau of Statistics. In an era where diversification has become a much talked about topic, it will be foolhardy if we, as a country fail to act on the potentials of the impact of MSMEs to the economy, rather than just talking about it.
The government’s part is to make sure that MSMEs have access to capital, the right infrastructure and technology to conduct their business – a conducive business environment – the common but true cliché.
It is however common knowledge that our MSMEs are inundated with a myriad of challenges, some of which are also tied to the general characteristics of the business environment in Nigeria: multiple taxation systems, unstable government policies, management problems, high cost of doing business, difficulties in accessing credit, and so on.
Access to finance remains one of the biggest of these issues. While banks recognise MSMEs as an important revenue source through credit facilities, they remain wary of this business group due to the difficulty of assessing and managing the risks associated with credit. This has translated to very stringent screening measures and requirements by the banks when considering credit/loans for MSMEs; although this does not necessarily mean a high rejection rate.
A recent publication by the Central Bank of Nigeria (CBN), in conjunction with the International Finance Corporation (IFC) titled, ‘The Credit Crunch’, showed that 87 percent of MSME respondents have had successful loan applications in the past. On the other hand, 69 percent of MSMEs who wanted loans but did not apply felt that they will be rejected because of the collateral requirements and other associated conditions attached to the loan approval process. Furthermore, there is a perceived ‘one-size-fits-all’ approach by financial institutions towards loan applications by MSMEs and their employees. It thus appears that many MSMEs and their employees find the process of obtaining loans – whether real or perceived – to be discouraging. The World Bank Enterprise Surveys in 2013, lends support to this: financial institutions often demand for immovable assets like land/buildings from MSMEs as collaterals 73 percent of the time, whereas, 78 percent of the capital assets owned by these businesses are vehicles, machinery, equipment and account receivables, which can also be used as movable collaterals.
The World Bank Enterprise Surveys in 2013, lends support to this: financial institutions often demand for immovable assets like land/buildings from MSMEs as collaterals 73 percent of the time, whereas, 78 percent of the capital assets owned by these businesses are vehicles, machinery, equipment and account receivables, which can also be used as movable collaterals.
The World Bank identified three key enablers for a responsible credit system: credit bureaus, collateral registry and a unique identification. All three of them are interwoven in the roles they play within the credit system. Within the last four years, the CBN has been working to either put these structures in place or enhance the existing ones. The oldest of these three in Nigeria is the Credit Bureaus, which have been at the heart of the credit reporting system for over eight years, though only 15 percent of MSMEs surveyed in the ‘Credit Crunch’ report know about their existence and importance. There are currently three credit bureaus in Nigeria and their existence enables financial institutions and any other organisation that is in a position to provide credit, to assess the credit history of a potential debtor. The credit history of an individual or a business, on its own, has the potential to provide a strong case for that individual or business’ credit worthiness. In an environment where the credit reporting system is operating at its maximum, it is common to find loans being granted solely based on the credit history and the entity’s capacity to pay back the loan; no collaterals required. The unique identification is taken care of by the BVN, which has been successfully incorporated into the financial system since its launch in 2014. The advantage of a unique identification number for every individual extends to both the National Collateral Registry and the credit bureaus’ operations.The newest of the three, the National Collateral Registry, went live in 2016; a web-based system that facilitates the use of movable assets as collaterals. It works by allowing financial institutions to register their security interest in movable assets such as machinery, equipment, livestock, accounts receivables, etc., which they accept from borrowers as collaterals for loans and conversely enables them to determine prior security interests registered on the collateral registry. The intent is to increase the use movable assets as collaterals away from land and buildings.
The newest of the three, the National Collateral Registry, went live in 2016; a web-based system that facilitates the use of movable assets as collaterals. It works by allowing financial institutions to register their security interest in movable assets such as machinery, equipment, livestock, accounts receivables, etc., which they accept from borrowers as collaterals for loans and conversely enables them to determine prior security interests registered on the collateral registry. The intent is to increase the use movable assets as collaterals away from land and buildings.
While the CBN has worked with the IFC in the last four years to strengthen the credit reporting system and establish the National Collateral Registry, the uptake and seamless operations of these two still need to be improved on. All the deposit money banks are already registered with the credit bureaus and make use of their services, but the microfinance banks are still growing in registration with the credit bureaus. Same can be said of other non-banking financial institutions like equipment leasing companies, mortgage companies, insurance companies, finance houses, etc., and non-financial institutions like the discos and telcos among others.
MSMEs and other members of the public also need to know how their credit history can enhance or mar their chances of obtaining loans. The principle is simple: businesses with a good credit history can easily have access to loans, compared to those with bad credit history. All of these will create a more robust and successful integration of the credit bureaus into the credit system. The improvement of the operating process of the credit bureaus also means reduced misrepresentation of data in the credit reports of their subjects and faster deliveries of credit reports when demanded. These are the challenges the credit bureaus have been battling for many years.
The National Collateral Registry bill was signed into law recently, which was a landmark achievement for the initiative. CBN also announced in December that the registry had recorded 32 billion Naira worth of transactions, with most of the deposit money banks already registered on it. All of these still need to translate to easier access to credit, whether actual or perceived by MSMEs and the general public. The National Collateral Registry still needs to address the concerns of Nigerians, particularly the financial institutions, around the general risks associated with dealing with movable assets as collaterals, the current state of development in Nigeria and the degree to which it could make loan applications faster and easier. The series of trainings and communication activities done around the collateral registry and credit reporting system by the CBN and IFC in 2016 will need to continue and be intensified to support the success of the programmes while the other technical issues are being addressed.
Like the early days of GSM and BVN in Nigeria, the National Collateral Registry and the strengthened credit reporting system will have their challenges and indeed they have, but with time and persistence, these may be addressed, and other challenges will be the focus, as we have seen with the growth of GSM and BVN in Nigeria. Ultimately their success will depend on the key players – the consumers, the financial institutions and CBN – how relevant they feel these initiatives are to them and the degree of the response of CBN to fix the issues associated with the operations of these enablers for a responsible credit system.
Osho is a staff of C&F Porter Novelli, Lagos