Collateral Registry for Movable Assets: Helping unlock access to finance for MSMEs across Africa
Micro-, small- and medium-sized businesses (MSMEs) remain the engines of Africa’s economies. They are the principal job creators, and thus critical sources of liquidity. Paradoxically, most entrepreneurs behind these ventures do not have land or real estate to use as collateral to access expansion capital such as bank loans. A 2006 World Bank study affirmed this observation, reporting that 50% of credit applications to banks were rejected because of “insufficient collateral.”
Microfinance plays an integral role in fulfilling this liquidity gap in Africa, as elsewhere, but is often insufficient, keeping many MSMEs from realizing their potential. Furthermore, weak creditor rights, including enforcement of contracts, property rights and collateral laws generally correlate to more conservative local lending practices, either through withholding of credit altogether or restrictions to short-term, overly-collateralized, and expensive lending. This legal environment is still common across the Continent and contributes to ongoing restricted access to finance for MSMEs.
It is well documented that “movable assets” such as vehicles, machinery, livestock and inventory often accounts for most of an MSME’s capital stock. Establishing a legal regime for using movable assets as security via a central, publicly available – and ideally, online – registry of collateral security is gaining momentum in emerging markets, including Africa. The collateral registry makes it possible for banks to lend to a new customer base, including clients who were often previously excluded from formal credit.
Online collateral registries have been successfully introduced in Ghana (2010), Liberia (2014) and Malawi (2016). The results, according to the IFC, are noteworthy: since 2010, the collateral registry in Ghana has facilitated approximately $3 billion in loans secured with movable assets; in Liberia, about $230 million, of which 30% has been for women entrepreneurs; and since 2016, nearly 16,000 MSMEs in Malawi have been able to access financing with their moveable assets.
Traction continues – in November 2018, Mozambique’s Parliament passed a bill establishing a legal regime for using movable assets as security via a central registry of collateral security. There is more work to be done, as there remains no official electronic repository in the country.
The total number of countries with a fully functional online collateral registry across Africa remains a minority. The scope for unlocking bank lending to the bottom of the pyramid via this intervention therefore remains substantial.
Source: World Bank, IFC