Collateral Registry Act, Credit Reporting Act 2017 and Nigeria’s economy
Just recently, precisely the 25th May, 2017, the National Assembly- the Senate and the House of Representatives passed into law the Credit Reporting Act and Collateral Registry Act which aim at affording Small and Medium Enterprises the opportunity of accessing loan facilities by providing/using movable assets as securities or what is known as collaterals to obtain loan facilities from financiers.
Prior to the enactment of these Acts, it was practically impossible for Micro Small and Medium Enterprises (MSMEs), to obtain loans from major financiers. This was so because no financier could afford to part with a huge sum of money without securing his interest in the form of collaterals or securities, which could serve as a fallback option in the event of a breach by the borrower in the fulfillment of his obligations.
On the 30th of May, 2017, the Acting President of the Federal Republic of Nigeria, Professor Yemi Osinbajo, assented to, the Secured Transactions in Movable Assets Bill, 2017 and the Credit Reporting Bill, 2017 as passed by the National Assembly now Acts, which are aimed at improving the lots and fortunes of Micro Small and Medium Enterprises in the Country.
This work is aimed at giving a brief overview or highlights of the contents of both statutes as it relates to the provision and grant of loan facilities to small businesses.
The Secured Transactions In Movable Assets Act 2017
This Act as a short title is known as the Collateral Registry Act 2017. In a bid to stimulate and promote economic growth in Nigeria, the Collateral Registry Act has been enacted to afford Micro and Small Medium Enterprises (MSMEs) the opportunity of acquiring loans from financial institutions (financiers) with movable assets unlike the former trend, where such securities were limited to immovable properties. For instance, businesses without interests in landed properties or real estate can now effectively approach financial institutions for loan facilities to boost their businesses. This can however be made possible by the provision of a security or what is generally known as a collateral by the borrower to the core financier. Interestingly, the Collateral Registry Act has introduced a twist to this innovation. To make this realistic, such movable assets are to be registered at the National Collateral Registry (The Registry), a body housed under the Central Bank of Nigeria with the responsibility of Collating and registering all Movable assets/collaterals, which are to be used to obtain loan facilities from various financiers. This purpose is to ensure that the interest of the creditor in this case, a financial institution, is secured against an unwilling borrower who might decide to abscond with the security earlier given.
In addition to this, the Registry stores information on security interests created over movable assets and provides unrestricted access to persons or corporate bodies who may seek any information on the security interest. It is to be noted that a Registrar appointed by the Governor of the Central Bank of Nigeria shall head the Registry.
Another major innovation by the Collateral Registry Act is that when a security is created on a movable asset, the secured creditor may perfect the security on the asset by filing the prescribed forms and provide other relevant information, which must be the particulars of the asset at the Registry. Amazingly, the Act allows the secured creditor to take physical possession of the security, it must however be noted that such an act of physical possession does not in the intendment of the Act constitute a perfection of the security.
It is interesting to note as well that the Collateral Registry Act in a swift deviation from the usual practice of realization of charged assets by secured creditors, has afforded a secured creditor the opportunity of attaching all identifiable and traceable proceeds of the assets (collateral) of the obligor/debtor and not only the secured assets. This means that material changes in the essential features or characteristics of the security asset will in no way affect the right of the creditor to trace the asset or go after the proceeds of the collateral.
Further to this and in the realization of the security, the Collateral Registry Act in an attempt aimed at strengthening the creditor’s right of realization of the interests, provides a variety of options to a secured creditor. These options range from: i. Resorting to judicial remedy under the law or under the agreement evidencing the grant of the facility. ii. A creditor can equally resort to non-judicial remedies of taking physical possession of the collateral without first having to approach the court to determine their collective and individual rights and obligations. (However, this particular option or remedy can only be invoked if it is contained in the security agreement); iii. The secured creditor can also elect to render the collateral, in this case, the movable asset, which was used as a security inoperative. It then means that the debtor’s business would be grounded pending the realization of the debt; and iv. As the last of the four options available to a secured creditor, a receiver can be appointed to take into custody the assets of the debtor.
While understanding the peculiarity and size of most MSMEs and the near impossibility of most MSMEs in securing loans from financial institutions as it were, the Collateral Registry Act has devised several structures to reduce or avoid perfection costs which among other things include cost on stamp duties and registration fees of various forms. The Act has solved this problem by exempting security interests from payment of stamp duties. This will go a long way in making it easier for MSMEs to easily access credit facilities without having to expend so much in the registration of the security to be used to secure such loans. Unfortunately, however, this privilege does not extend to MSMEs registered as limited liability companies. MSMEs registered as limited liability companies are still expected to undertake the payment of duties on every registered asset. This is because the Collateral Registry Act does not preclude Companies with the limited liability status from registering such securities. Hence, a limited liability Micro and Small Medium Enterprises must register all security at the Corporate Affairs Commission in accordance with the Companies and Allied Matters Act.
Credit Reporting Act 2017
A major essential feature of the Credit Reporting Act (CRA) is the establishment of the Credit Bureaux, which is saddled with the responsibility of receiving information from ‘credit information providers’. These credit information providers supply the Credit Bureaux with vital information on the credit worthiness, credit standing and capacity of persons and their various financial obligations. Information on the details of the asset is also supplied to the Bureaux.
Information supplied to the Bureaux is then transmitted to a chain of users known as the ‘credit information users’. Hence, the Credit Bureaux may then share such information obtained from credit information providers to credit information users who meet certain conditions before the information is transmitted to them.
The major objective of the CRA is to facilitate and promote access to credit and enhance risk management in credit transactions, as well as promote access to accurate, fair and reliable credit information while ensuring that the privacy of such information is protected. In addition to the above outlined objectives, the CRA is enacted to promote fair and competitive credit reporting system. The Act also makes it mandatory for all Credit Bureauxto be licensed while laying down frameworks for licensing of the Bureaux, including terms and conditions for revocation or upon which the licences may be revoked.
Hence, the Act requires that any individual who seeks to perform the functions of Bureaux must first be licenced by the Central Bank of Nigeria. Further to this, such a person prior to being licenced by the Bank must have been incorporated as a limited liability Company with shares under the Companies and Allied Matters Act. Flowing from the above contents of the Act, one cannot effectively discharge the functions of Credit Bureaux without first being licenced by the CBN.
The functions of Credit Bureaux include but are not limited to creating and maintenance of a database of credit and credit-related information in accordance with the provisions of this Act. It also receives, collates and compiles credit-related information from credit information providers, issues credit reports to financiers on the financial strength and capacity of borrowers.
Furthermore, in a bid to foster amicable resolution of disputes between prospective parties in credit financing transactions, the CRA introduces an Alternative Dispute Resolution Centre.
The Act creates various offences including knowingly providing inaccurate, misleading or false information to Credit Bureaux, credit information providers or users. Failing to submit or update credit information within the required time frame among other things also constitute offences under the CRA.
Penalties for the above stated infractions range from payment of fines or imprisonment for a period not less than 10 years.
The impact of the CRAs on Nigerian Economy
In 2015, the World Bank in its statistics and review of the benefits of MSMEs projected that MSMEs contribute up to 60% of total employments and up to 40% of national income, Gross Domestic Product (GDP) in emerging economies, which is inclusive of Nigeria. It further projected that these numbers are significantly higher when informal MSMEs are included and this can only be achieved when MSMEs can access credit facilities with available movable assets. Furthermore, studies have shown that better access to credit facilities can have considerable advantages for both the MSMEs, the government and to the overall economy; as per higher tax revenues, better regulation and many other benefits. In essence, improving MSMEs’ access to finance/finding solutions to unlock sources of capital (as intended by these Acts), is crucial to enable this potentially dynamic sector to grow and will in no distant time create a self-sustaining economy for our country, Nigeria.
Drawn from the foregoing, it is save to submit that whilst it is unarguable the fact that MSMEs play significant roles in the development of any economy, most MSMEs find difficulties in accessing credit or loans with available statistics showing that most small businesses do not survive beyond their early years of formation and only few can flourish to maturity stage.
It is therefore believed that a careful, honest and an in-depth implementation of these Acts, the Collateral Registry Act and the Credit Reporting Act, will in the long run address the problems and challenges faced by MSMEs and will have a somewhat revamping effect on the economy. This is anchored on the projection that with the injection and availability of loan facilities to small businesses, a large number of small business concerns which could in turn grow to large conglomerates would be birthed, thereby increasing productivity and reducing economic redundancy- ‘economic brain drain’ amongst business minds.
With the coming of these laws, SMEs are encouraged to take advantage of this sterling opportunity to improve their business ideas, while ensuring that they seek proper advice from relevant professionals.
Nmema is an associate counsel at Kevin Martin Ogwemoh Legal, Lagos.