Cows For Collateral

Looking at the definition of the 2007 buzzword “Credit Crunch”- an economic condition in which credit is difficult to obtain - we might say Nigeria’s credit is currently crunched and hampering businesses. An unfortunate position because with the appropriate access to credit SMEs have the potential to turn developing economies to developed ones.

Recognising this, the recently passed Secured Transactions in Movable Assets Act looks to address one of the main facilitators in Nigeria’s credit economy and could put SMEs in the driver's seat.

Nigeria’s Credit Climate

Credit is loosely used to describe any form of financial ‘I-owe-you.' Nigeria’s credit climate suffers from two inter-related issues: size and cost. Data from last year shows that Nigerian banks lent the equivalent of 16% of GDP to businesses - below the 28% average for least developed economies. To make money matters worse, this scarce credit is not cheap. As of September, the best borrowing rate available to Nigerians was 18%, with some banks charging up to 30% interest. Meaning if you're not making more than ₦18 - ₦30 for every ₦100 you borrow, then loans may prove difficult to maintain.

The main reason banks are reluctant to lend to Nigerians is the lack of data to support lending decisions, which makes lending risky. Cash dominates transactions in Nigeria, and because cash changes hands many times without being traced, it is hard for banks to learn about how Nigerians handle money - who is trustworthy? Even in Lagos, banks only have credit information for around 8% of Lagosians.

Besides the preference for cash, Nigeria’s low credit card penetration denies Nigerian banks the crucial foundation for credit data that other banks enjoy in other economies.

This shortage of data places the onus on borrowers to prove our creditworthiness to the banks. Typically, collateral – an asset used to recoup the money lent in the event of a default – is used to support creditworthiness. However, banks need assurance that the asset is ours, exists in good condition, and is not already pledged to someone else. If we can successfully convince them of this, then we effectively reduce our risk profile. This reduction in risk makes a bank more willing to lend and at a lower interest rate.

An African solution to an African problem

While shifting to a cash-less economy would boost credit data in Nigeria, it hasn't been a smooth process. Regardless, Nigeria is set to benefit from a lighter and quicker solution, one which countries like Ghana and Liberia have successfully implemented over the years: introducing the Collateral Registry.

Historically in Nigeria, collateral has been synonymous for land. This is because land used for collateral are typically registered with state governments making it easier for banks to verify ownership and other essential lending information about the land. However, only a fraction of SMEs own any land and therefore cannnot use collateral to secure better lending terms. The main assets for SME’s are usually machinery and output such as a farmer’s tractor or yam produce - movable assets.

National Collateral Registry

Banks are most concerned about traceability, history, and value of collateral. Historically such records have been difficult to gather for movable assets as their information is stored in various places, if stored at all. The Collateral Registry addresses this gap by creating a unified online platform were any movable asset used as collateral is registered. Although the registry has been in operation since 2016, the Secured Transactions in Movable Assets Act codifies what were previously guidelines for the registration of movable assets.

This means that a Fulani Nomad who owns little more than eight cows, can register and pledge them against loans to secure himself cheaper funding for a milk line. For ₦1000 our Nomad will register his details, the details of his cows, the details of the bank giving him the loan and any supporting documents that will help banks determine the value of his cows such as their age, appearance, and breed. In return, his cows will get a unique collateral serial number.

Now should our Nomad try to secure another loan backed by his cows all a lender needs to do is find his business on the registry and download all the information they need to decide on taking his cows as collateral. This illustration applies to any form of movable asset one might own, be it machinery, crops, livestock or intangible assets like other bank accounts. Just by creating a platform for trust and transparency, the registry opens the doors for more SMEs to access potentially cheaper loans.

Collateral isn't everything 

While the collateral registry makes it easier to register collateral - highlighted in the ₦392 billion of collateral recorded as of August - it is just a safety net and does not necessarily change the underlying economics of a loan or the application process. A bank’s primary concern is getting their interest, they do not necessarily want ownership of your computers, and so SMEs still need to demonstrate their ability to pay off loans before the full benefits of collateral can take place.

Credit is a facilitator of economic development, and collateral is a facilitator of credit. The registry does not quite pump credit into the economy, nor does it force base interest rates down. The onus is still on SME owners to prove their creditworthiness in Nigeria, but it does help SMEs in this battle by enabling them to use their non-land assets to reassure Nigeria's risk adverse banks that they will be protected if all else fails. 

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