28 Jul MSMEs: Use of Security in Accessing Funds
Micro, Small and Medium Enterprises (MSMEs) are a key sector of the Nigerian economy. MSMEs contribute to roughly 47% of the GDP in Nigeria and are seen as significant contributors to employment generation and poverty amelioration.
One of the major challenges faced by MSMEs is the lack of access to affordable funds. This is largely due to their inability to provide property as security for loans. Most financial institutions demand such security for granting loans.
To help alleviate this, the Federal Government, in its drive to promote the ease of doing business in Nigeria, recently introduced The Secured Transactions in Movable Asset Act 2017 (otherwise referred to as the Collateral Registry Act) (herein referred to as ‘the Act’).
With the enactment of the Act, MSMEs are now in a position to obtain credit secured by their movable assets. Movable assets can be defined as “tangible and intangible property other than real property.” These assets can include inter alia vehicles, equipments etc.
Some of the key features of the Act are the Security Agreement, the National Collateral Registry and the Protection of Creditors. This article will highlight these areas as well as Registration Cost and Realisation of Security.
A Security Agreement is an agreement that provides a Lender/Creditor a security interest (i.e. property right) in a specified asset or property that is pledged as collateral by a Borrower for the advancement of a loan or facility. The agreement is typically entered into between a Grantor/Borrower and a Lender/Creditor. In the event that a borrower defaults, the pledged collateral may be seized and sold by the Lender. For a Lender/Creditor, a Security Agreement mitigates the risk of default by a borrower.
According to Section 5 of the Act, a Security Agreement should:
‘reflect the intention of the Grantor and Creditor to create a Security Interest, identify the Grantor and Creditor, describe the secured obligation including the maximum amount for which the Security Interest is enforceable, describe the collateral adequately and indicate the tenor of the obligation secured’.
The National Collateral Registry
This has been set up by the Central Bank of Nigeria. The Collateral Registry, which is being managed by a Registrar as appointed by the Governor of the Central Bank of Nigeria, is responsible for receiving, registering and storing Security Interests in moveable assets. They are also required to provide access to Creditors who may wish to enquire about a particular Security Interest.
Protection of Creditors
The Act has made certain pronouncements that can be viewed as a protective shield for Creditors. These include, but are not limited to:
1. The ability of a Creditor to search the Collateral Registry for information pertaining to a particular Security Interest for a fee.
2. The Creditor has a right to sell, lease or license the collateral if the Borrower defaults.
3. The Creditor can employ the service of the Nigerian Police to repossess the collateral in the event of a default by the Borrower.
4. Perfection of security interest by the Creditor at the Collateral Registry. A perfected security interest has priority over the rights of an unsecured creditor that has obtained a judgment or an order of attachment.
In addition to some of the above, realisation of security can come in other forms such as:
5. Instituting legal action
6. Collection and application of an account receivable, money or negotiable instrument taken as collateral to the satisfaction of the obligation secured by the security interest.
7. Rendering the collateral inoperative
- By virtue of Section 42 of the Act, this can arise if the collateral cannot be easily moved from the Grantor’s premises or if the collateral will require a specific storage facility that is not immediately available.
8. Appointing a Receiver as provided by the Companies and Allied Matters Act (CAMA)
- This entails assigning a neutral person to manage the collateral until the realization of the security.
The Act has exempted the payment of Stamp Duties on security interest created over movable assets. It however does not provide any exemption from payment for the purposes of registering the security interest by the MSME. MSMEs that are registered as a limited liability company under the CAMA are still required to adhere to all costing as it partakes to the formation and registration of a security interest.
Taking into consideration that the Collateral Registry Act is in its infancy stage, it is too early to determine its success however based on its objectives and focus area, it is safe to say that it is a welcome development for MSMEs. In relation to the country, the Act will promote further growth within the private sector as well as enhance economic growth.
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