Nigeria MSME’s poor credit history, non-bankable collateral hinder access to finance, says Detail Solicitors

Nigerian small and medium scale enterprises’ poor access to commercial credit has been linked to a lack of credit history by the companies, their inability to provide acceptable collateral and poor advisory services by banks on record keeping.

Data available to businessamlive indicate that out of an estimated 37 million micro, small, and medium-sized enterprises (MSMEs) in Nigeria, only 31 percent are able to access credit for their businesses from local financial institutions, both commercial and micro finance banks due to MSME’s lack of credit history and their inability to provide acceptable collateral, which usually see them falling short of the underwriting conditions of the banks.

Specifically, as at Q4 2015, loans to MSMEs accounted for meager 0.1 percent of total credit advanced by commercial banks.

However, some analysts say poor advisory role by banks is another key hindrance as most loan requests of the MSMEs are often turned down because of the absence of credible financial records, which banks are supposed to guide and tutor their customers.

Analysts at Detail Commercial Solicitors, while hinging on the role of collateral said that prior to the enactment of the Secured Transaction in Movable Assets Act (popularly called the Collateral Registry Act), there was no legal framework for the registration and enforcement of security interest in movable assets (such as automobiles, plants, and machinery, account receivables, commodities, amongst others).

As a result, commercial lenders, over the years, restricted collateral to real estate and other forms of credit guarantee products, which are typically required to be cash-backed.

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MSMEs have, therefore, had to rely principally on self-funding and informal credit support (from friends and family) to sustain their businesses. This dearth of liquidity has significantly hampered real sector growth and the contribution of MSMEs to economic development. (MSMEs currently contribute about 47% of real GDP with growth capacity that is almost non-exhaustive.)

But in a bid to improve financial inclusion and MSMEs’ access to finance, the Central Bank of Nigeria (CBN), in September 2014, introduced the Collateral Registry Regulation (the Regulation), which established the National Collateral Registry (NCR), to facilitate the use of movable assets as security for credit and also provide an efficient process of registration and realization of such security interest without jeopardizing the integrity of the financial market.
However, The Regulation was unable to garner the desired impact given the fact that it lacked legislative backing that would guarantee its enforcement.

To reinforce the objectives of the Regulation as well as give it the backing of law, the National Assembly — as part of the 60-day national action plan on ease of doing business — committed to expedite the passage of the bill, which was sponsored by the Presidential Enabling Business Environment Council (PEBEC is responsible for implementing the FG’s ease of doing business policy). The bill was finally assent by the Acting President, Yemi Osinbajo, on 30th May 2017.

By deepening the pool of assets, which may form the basis of a registrable security interest, and providing incentives to register such security, the Act is poised to have a significant impact on financial inclusion and access to credit in the Nigerian market. The success of the initiative will, however, be hinged on the ability of the willingness of our financial institutions to provide credit to this otherwise excluded market segment.

It is expected that the new law will enhance responsible lending to MSMEs and boost real sector growth.