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SECURING LOANS WITH LIVESTOCK AND MORE: THE NATIONAL COLLATERAL REGISTRY’S IMPACT ON SMES IN NIGERIA
By Oluwafemi Kater Ilori Esq
Introduction
Starting an enterprise in Nigeria is no small feat, research shows that 50% of Small and Medium Sized Enterprises (SMEs) fail in their first year of operation while more than 95% of SMEs do not survive beyond the first 5 years. Among the key challenges faced by SMEs are; accessing finance, facilities and finding customers.[1]
Most SMEs survive the storm by securing loans using collateral. Collateral has traditionally been a cornerstone of lending, where borrowers pledge valuable asset or property to secure a loans and guarantee payment. In Nigeria, traditional lending practices often requires borrowers to secure loans by providing fixed assets such as land or buildings which will guarantee repayment.
Collateral is a valuable asset or property used by a borrower to secure a loan from a lender.[2] This collateral in some cases must be equivalent to the money borrowed, so that where the borrower defaults the lender does not suffer any loss. It ultimately serves as an assurance to the lender that he will be refunded his money by the borrower. Common examples of collateral include vehicles and real estate or anything of value to match the loan.[3] It acts as insurance indicating to the lender that the borrower has the ability to pay.
Despite the importance of collateral, small and medium sized enterprises (SMEs) in Nigeria face significant challenges in trying to have access to loans due to lack of traditional forms of collateral like land or real estate typically required by banks to secure a loan. It is a critical issue for a country like Nigeria were In Nigeria, SMEs contribute 48% to the national GDP and SMEs account for 96% of businesses, and 84% of employment opportunities.[4]
To address this barrier, The National Collateral Registry (NCR) was established, enabling small and medium sized businesses to secure loans using their movable assets such as vehicles, livestock and inventory. This innovation encourages business growth and economic development. This article explores the challenges faced by small and medium sized business in accessing loans and how the initiative of the NCR serves as a viable solution to address these issues.
Legal Framework for National Collateral Registry
The Secured Transactions in Moveable Assets Act, 2017 (STMA) serves as the legal framework for the operations of the National Collateral Registry (NCR). It came into effect on 30th of May 2017 and was enacted to formalize and strengthen regulatory environment for NCR, providing a legal framework for the registry’s operation after the NCR was launched. Prior to the Act’s enactment, moveable assets were regulated by the Central Bank of Nigeria’s (CBN) Registration of Security Interests in Movable Property by Banks and Other Financial Institutions in Nigeria Regulation 1 of 2015 (Regulation). The STMA thus establishes a comprehensive regulatory framework for registering creating, maintaining and regulating security interests in movable assets.[5]
The objectives[6] of the Act are to
- Enhance financial inclusions in Nigeria, that is to expand access to credit facilities to micro, small and medium enterprises (MSMEs).
- Stimulate responsible lending to MSMEs; that is encouraging financial institutions to provide credit to MSMEs
- Facilitate access to credit: Provide the use of movable assets as collateral for securing loans.
- Facilitate perfection of security interests in movable assets: simplifying the procedures for perfecting security interest in movable assets.
- Facilitate realization of security interest in movable assets: To enable the enforcement of loans in the event that the borrower defaults[7]
- Establish a collateral registry and provide for its operations: provide a foundation for the creation, operation and maintenance of the NCR.
What is the National Collateral Registry?
In Nigeria, an estimated 37 million micro, small and medium size enterprises (MSMEs) play a significant role in the nation’s development and economic growth.[8] However, many of these enterprises struggle to secure the capital required for expansion and growth. The primary obstacle lies in the fact that they lack the required traditional forms of collateral, such as land and buildings to secure loans. Typically, Financial institutions are more inclined to prefer immovable property because it is easier to regulate and track[9] and registries exist to record any transaction or encumbrances on such properties, simplifying ownership verification in contrast to movable assets which makes them less attractive as collateral.
To address this gap, in May 2016 the Central Bank of Nigeria (CBN) with support from the International Finance Corporation (IFC) and World Bank Group Launched the National collateral Registry of Nigeria (NCR)[10]. The establishment of the NCR is to enable low-income individuals, small scale businesses and medium scale enterprises to secure loans using their movable assets. These assets include vehicles, livestock and inventory.
The innovative approach of the NCR has made it possible for unconventional assets such as a goat to serve as collateral for loans.[11] It is a unique feature that aligns with the realities of Nigerian businesses, where livestock and other movable assets are most valuable possessions of MSMEs. Thus, supporting financial inclusion, business growth and strengthening the nation’s framework.
Registration of Assets
The National Collateral Registry (NCR) simplifies the process of registering movable assets as collateral. Clients can easily access the registry through its website at https://ww.ncr.gov.ng on a web browser. Financial institutions licensed by the Central Bank of Nigeria (CBN) under the Banks and Other Financial Institutions Act are required to create a client account on the NCR System for them to be able to register a financing statement.[12]
Key Steps in the Registration Process
1. Account creation
• institutions must provide their CBN bank or financial institution code to be authenticated in the system before the account can be created.
• It is imperative to note that only legal financial institutions regulated by CBN can register as clients.
2. Postpaid Accounts:
- Financial institutions with accounts with the CBN can setup a Postpaid account and pay for services such as registration of financing statement and searches in the collateral registry which requires payment. Such payments can be made later via settlement with CBN Postpaid account holders must have a clearing account with CBN and obtain approval from the NCR Registrar
3. Public User Access
- Public users do not need an account to make payments. They can pay for searches directly by providing details such as payer’s name, email address, phone number and BVN.
4.Payment Methods
- Payments can be made via Webpay or DirectPay through Interswitch. Fees apply to services such as registering financing statements and conducting searches.
How Lenders Verify Collateral Before Granting Loans
Lenders can verify collateral with ease by accessing the online collateral registry and searching for any interest in the collateral by debtor ID number or by the collateral serial number.[13]
Search by Debtor Id Number[14]
1. Navigate to the Search Menu on the home page and select the “Search Financing Statement”.
2. Select the appropriate search criteria. (e.g company/cooperative Name or Individual Debtor)
3. Enter the Business Registration Number or BVN, as applicable.
4. Then, click on the Submit Search Request button to submit search request.
5. The Payment Verification page is displayed requesting you to enter your PIN Code.
6. Enter the PIN Code on your payment receipt in the Payment Verification box and click on the Submit Search Results button.
7. To view and generate the search report, select item by checking its box, and then click on the View and Generate Search Report button to generate search certificate.
8. You may also request for a copy of the Search Certificate to be emailed to your inbox by checking the box, send generated search report to my inbox and then click on the Generate Search Report button.
Search by Collateral Serial Number[15]
The same steps ad searching by debtor ID but select the “collateral serial No” option and input the serial number which will then display information on the collateral.
Types Of Collateral Allowed
There is a wide range of movable assets which the NCR allows to be registered as collateral. It enables creditors to create security interest in debtor-owned assets.
1. Consumer Goods: These are goods that are used or intended to be used primarily for personal, family or household purposes. Consumer goods include assets like household appliances, furniture, a personal computer, laptop, etc.
2. Business Assets: Equipment, inventory, accounts receivable, and other assets used in commercial operations.
3. Vehicles and Machinery: Motor vehicles, boats, planes, and other movable machinery.
4. Farm Products: Crops, fish stocks, poultry, livestock, and related products.
5. Extracted Resources: Oil, gas, minerals, and severed trees.
Exclusions: Real or immovable property is excluded from the NCR and is governed by separate land registration laws such as the Conveyancing Act and the Property and Conveyancing Laws in various states.
Third-Party Security Interests: A person other than the borrower can grant a security interest in their assets, provided they execute a security agreement. This allows flexibility in securing loans.
Conclusion
The National Collateral Registry is cornerstone of financial inclusion and economic growth in Nigeria. Despite its immense potential, many are still unaware of its existence, and some remain skeptical about its effectiveness. However, by streamlining the registration and verification of movable assets, it has enabled lenders to mitigate risks and borrowers to leverage their assets effectively. Its robust regulatory framework and user-friendly processes, the NCR facilitated over 16,236 financing statements for 20,684 movable assets, valued at N392 billion.[16] Thus, showcasing its ability to bridge the gap between lenders and borrowers. Financial institutions, businesses and individuals are encouraged to explore the transformative potential of the NCR and use its opportunities to foster growth and inclusion.
Caveat!
The information in this article is meant for information and educational purposes only. It should not and it does not amount to legal advice. For further information kindly reach out to the contacts provided hereunder.
For more information contact
info@lehiattorneys.com
katerilori@gmail.com
www.lehiattorneys.com
[1] https://moniepoint.com/blog/nigeria-small-business-statistics
[2]https://www.investopedia.com/terms/c/collateral.asp#:~:text=Collateral%20is%20an%20item%20of,it%20to%20recoup%20its%20losses.
[3] https://corporatefinanceinstitute.com/resources/commercial-lending/collateral/
[4] ibid
[5] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.aelex.com/wp-content/uploads/2017/12/ENABLING-ACCESS-TO-CREDIT-IN-NIGERIA-THE-SECURED-TRANSACTIONS-IN-MOVABLE-ASSETS-ACT-2017-2.pdf
[6] Section 1 Secured Transactions in Movable Assets Act, 2017)
[8] https://abdigital.com.ng/the-role-of-smes-in-nigeria-economic-development/#:~:text=Currently%2C%20there%20are%20over%2037,for%20each%20of%20these%20MSMEs.
[9] https://www.aelex.com/an-overview-of-the-secured-transactions-in-movable-assets-act-2017/#:~:text=Financial%20institutions%20in%20Nigeria%20prefer,and%20encumbrances%20on%20the%20land.
[10] https://www.ncr.gov.ng/home/about
[11] https://www.ncr.gov.ng/home/about
[12] https://www.ncr.gov.ng/home/about
[13] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.ncr.gov.ng/docs/Public%20User%20Manual.pdf
[14] ibid
[15] ibid
[16] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.cbn.gov.ng/out/2017/ccd/ncr%20maiden%20newsletter.pdf
