Friday, January 22, 2021

Collateral Registries: new approaches to SME and entrepreneurship financing

BY PORTIA NKANI

Bank lending is the most common source of external finance for many Small and Medium sized Enterprises (SMEs)  and entrepreneurs, which are often  heavily reliant on traditional debt to fulfill their start- up, cash flow and investment needs.

While it is commonly used by small businesses, however, traditional bank finance poses challenges to SMEs, in particular to newer, innovative and fast growing companies, with a higher risk-return profile.

It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.

Countries are now considering collateral registry route as a way to modernize the country’s financial infrastructures.

The benefits of the collateral registry include enabling businesses to leverage their assets to obtain credit for growth, improve assets liquidity especially short-term assets, and allow asset diversification as well as to reduce cost and promote prudent lending

Many SMEs are excluded from the formal credit market largely because they lack assets that can serve as collateral.
They may generally have a wide range of productive assets that can secure a loan such as the goods they produce or process, accounts receivable from clients and warehouse receipts but the legal framework prevents this.

Just like in other Sub Saharan countries, in Botswana it has been observed that currently the volume of credit to the private sector especially the micro, small and medium enterprises is relatively low compared to other countries.

This is in view of the fact that access to credit is crucial for economic growth and private sector development. A major hurdle to the flow of credit is that currently financial institutions only take immovable property as collateral for credit.

However, through the concept of a Collateral Registry, households and businesses can register their movable assets as collateral to get credit from lenders.

Such movable assets include vehicles, industrial and agricultural equipment, machinery, inventory and raw materials, accounts receivables, intellectual property rights, and agricultural products such as crops, and livestock.

In his maiden state of the nation address recently, President Mokgweetsi masisi announced that, his government is in the process of drafting legislation that will establish a Collateral Registry in Botswana. “The target is to have the Bill submitted to Parliament in the 2019 July sitting,” he said in his speech.

BancABC recently became the first bank to announce plans to go into the development of Small and Medium Enterprise (SMEs) collateral registry.

BancABC Managing Director, Kgotso Bannalotlhe said despite the difficulty in having access to collaterals, banks do however require it.

Bannalotlhe explained that, “it is difficult having access to collateral and being sure that you are the only one that has access to that collateral, typically the only way you can do it at present is through registering deeds of hypothecation which can be quite expensive.”

One of Botswana’s entrepreneurs, Loatile Seboni expreseed applauded the move by Botswana as it will empower those who have been literally locked out of getting credit because they did not have immovable properties to use as collateral. “if we did, one found it too risky to use it lest you lose it in the process and end up with nothing in the case of a house for instance,” she said in response to Sunday Standard.

Botswana will be amongst the few countries which recently also introduced rthe model in order to broaden the range of SMEs to borrow. In November 2017,

Zambia became the sixth country in Sub-Saharan Africa to establish a modern, online registry with the support of the World Bank Group, following Ghana, Liberia, Malawi, Nigeria, and Sierra Leone.  

IFC, a member of the World Bank Group, together with the Bank of Zambia, launched this innovative financial tool that to allow smaller businesses in the country to use moveable assets such as machinery or equipment to access loans, helping them grow.

Ghana also in recent years introduced collateral registry for SMEs.

The enactment of the Borrowers and Lenders Act 2008 and the  establishment of the Collateral Registry by the Bank of Ghana; ushered Ghana into a Secured Transaction Regime (STR) which provides for the creation, perfection,  priority and enforcement of security interest on both movable and immovable property.

Today in Ghana, the mechanism for enforcing credit agreements has been significantly improved. In the exercise of the right to take possession of property that is subject to a security interest, the lender is not obliged to initiate proceedings in court to enforce the right of possession in the event of a default.

The mandate of the Collateral Registry in Ghana was a response to the teething problems in Ghana’s credit market which eventually was constrained and stifled the flow of credit to SMEs in particular and the economy as a whole.

Today lending has become less risky since lenders have collateral to fall on when a borrower defaults in payment and interest rates on lending are expected to decline which will lead to more credit to SMEs and greatly improve the act of doing business in Ghana.

In the aftermath of the 2008-09 global financial crisis, the bank credit constraints experienced by SMEs in many countries have further highlighted the vulnerability of the SME sector to changing conditions in bank lending.

According to the World Bank, modern Secured Transactions Laws and Collateral Registries have a dramatic impact on economic development, as they increase the availability of credit and reduce the cost of credit.

Collateral provides the basis for free-flowing credit markets, reducing the potential losses lenders face from non-payment. While land and buildings are widely accepted as collateral for loans, the use of movable collateral (such as inventory, accounts receivables, crops and equipment) is restricted because many countries do not have functioning laws and registries to govern secured transactions.

The Bank is in support of reforming the framework for movable collateral lending that allows SME businesses to leverage their assets into capital for investment and growth.

Today the Bank assists government clients in developing the appropriate legal and institutional frameworks to allow and encourage the use of movable assets as collateral for loans.

It combines deep knowledge and global experience to help modernize legislation, build electronic registries, and improve the capacity of stakeholders.

Between October 2007 and June 2011 the secured transactions reform work the World Bank supported in  HYPERLINK “http://documents.worldbank.org/curated/en/610531486453400854/IFC-secured-transactions-advisory-project-in-China” China cumulatively facilitated US$3.58 trillion accounts receivable financing, of which US$1.09 trillion went to SMEs. As a result of the reform the total number of commercial loans involving movable assets grew by 21% per year over 2008-2010, versus a flat rate over the period 2006-2008.

HYPERLINK “http://www.worldbank.org/en/news/feature/2015/11/18/liberia-collateral-registry-expands-access-to-finance-amidst-ebola-crisis” Liberia started a collateral registry in 2014 to securitize movable assets, making it possible for farmers and entrepreneurs to use such assets against which they could borrow money.  In less than a year since its launch ÔÇô most of which was during the Ebola crisis ÔÇô US$227 million in loans were registered.

In May 2016,  HYPERLINK “http://www.worldbank.org/en/news/feature/2016/08/03/nigerias-new-collateral-registry-aims-to-increase-access-to-finance-for-small-business” Nigeria launched a modern online collateral registry with the support of the World Bank Group. The registry will allow low-income people and small-scale entrepreneurs to secure loans against movable assets such as machinery, livestock, and inventory.

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