With the number of Nigeria’s unemployed put at a staggering 20.9 million, the solution to this mammoth problem clearly lies with the MSMEs in the nation. Improved access to credit for MSMEs is a welcome development for easing the hustle so they can scale, create more jobs and stimulate economic growth.
By Yvonne Johnson
The estimated 37 million Micro, Small and Medium-sized Enterprises (MSMEs) in Nigeria hold a lot of promise for job creation and economic growth. An enabling business environment is important for these businesses to thrive in the large, young consumer market that is Nigeria. Access to formal credit is a prerequisite to scale and recent laws will improve liquidity of movable assets to incentivize lending.
The Presidential Enabling Business Environment Council (PEBEC) was established in 2016 to design ease of doing business policy reforms. A 2017 IFC survey found that secured credit transactions involving movable assets (such as inventory, receivables, livestock, and machinery) can increase credit levels for small businesses. Consequently, PEBEC, in collaboration with the National Assembly and MDAs, delivered reforms through two new laws – The Credit Bureau Act, 2017 and the Secured Transactions in Movable Assets Act, 2017. These were a significant milestone for MSMEs, as they unlocked capital by expanding the pool of eligible collateral for lending.
PEBEC’s work sets the stage for lenders to adopt better risk innovation to close a widening SME credit gap. This involves predictive analytics models to supplement credit bureau data. For risk managers, the implications for much needed risk innovation is an exciting aspect of ongoing digitization programs within Financial Services. Beyond improvements in customer experience, lenders can also expect to drive both revenue and cost value across the credit value chain.
Easing the Hustle
Nigeria’s economy is slowly recovering from recent shocks, but growth is well below what is required to overcome vulnerabilities and improve citizens’ welfare. PEBEC’s focused mandate is to improve our position in the annual World Bank Doing Business Rankings. The expectation is for a much favorable landscape for enterprise, particularly SMEs, to thrive and ultimately scale operations. This in turn incentivizes greater investment, both domestic and international.
PEBEC prioritized 7 reform areas along the World Bank rankings framework including access to credit. Completed reforms have focused on a better credit infrastructure including stronger collateral laws to incentivize capital providers. The Credit Reporting Act 2017 which was passed by the National Assembly in May 2017 gives borrowers the right to access their credit reports. This increased visibility into one’s credit profile is key to influencing better personal (and business) finance behavior. As a value-added service for lenders, it also incentivizes credit ratings as part of the lending value chain. A Bank who is smarter about the risk profile of its loan applicants is better able to manage risk.
The second notable policy reform is the Secured Transactions in Movable Assets (aka Collateral Registry) Act 2017 passed by the National Assembly also in May 2017. Historically, lenders (both Bank and Non-bank) have focused on fixed assets – land or buildings – in their collateral requirements. In low – middle income countries, land and buildings form 22% of assets firms own and 73% of assets banks have accepted as collateral. This mismatch is what the collateral registry seeks to address. By expanding the definition of acceptable loan collateral, SMEs can now access credit by leveraging movable assets such as receivables, vehicles, jewelry, farm equipment and produce. The collateral registry, operated by the CBN, allows lenders register security interests in movable assets accepted as loan collateral. In most cases, these interests have priority rights providing downside protection in cases of enforcement. As of December 2018, the National Collateral Registry had registered 628 financial institutions, including 21 Banks and 551 Microfinance banks. Registered collateral stood at over 58,800 with close to 40,000 financial statements valued at N1.23T, $1.14B and €6.08M.
Globally, collateral registries have been instrumental in improving access to credit for MSMEs. China created a national online registry in 2007 and in less than 5 years recorded over 385,000 registrations representing loans worth $3.5T with $1.1T allocated to SME financing. In May 2015, a new secured-transactions system came into effect in Costa Rica. In the year that followed, there were about 9,500 new registrations. More than 4,500 SMEs received loans secured by movable assets. Finally, Ghana launched its collateral registry in 2008. In 2yrs, they achieved over $800M in total financing secured by movable property, with receivables, investment securities (shares, cash, bonds), and household assets being the top 3 categories of moveable collateral; 63% of financial institutions now use the registry.
Risk Innovation to Fuel Consumer Credit.
PEBEC’s work to unlock credit for businesses also aligns nicely with the need for banks to deepen consumer credit. Forecasts show African banks will continue to struggle with a high cost structure, lower financial inclusion and low wealth per capita. However, consumer credit presents a growth opportunity with far reaching social impact. A well-functioning consumer credit market is also a necessary step to capital formation.
Lending is a risk management business, not a risk avoidance business. Innovative lenders can drive better customer risk profiling. For example, predictive analytics can be integrated into credit algorithms for use in SME credit underwriting. While bureau records identify prior credit behavior, it is limited with predicting who will not pay in the future. Banks have the added advantage of rich transaction datasets to distinguish between the really risky businesses and the ones to extend credit to profitably. Lenders will in essence capture a segment of the market that competitors have missed and thus increase market share. Data-driven credit models are a powerful tool that can be used to score or rank potential customers based on probability of default and will be invaluable in virtually every lending institution.
Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.