Emefiele: National Collateral Registry Will Awaken Entrepreneurial Spirit of Nigerians
Micro, small and medium scale enterprises are the backbone of any economy. In the world today, there are over 400 million SMEs and an estimated 40 million of them are in Nigeria. However in Nigeria, data shows that less than 14 per cent of them have access to financing. Most times, they are forced to take informal loans attracting exorbitant interest rates because they do not have fixed assets—such as land or buildings—that banks demand as collateral. But Central Bank of Nigeria Governor, Mr. Godwin Ifeanyi Emefiele, in this interview with Chika Amanze-Nwachuku and Obinna Chima, is optimistic that with Secured Transactions in Movable Assets Act (otherwise known as National Collateral Registry Act), all that would change. An elated Emefiele explained that instead of insisting on fixed assets from MSMEs, banks would now start accepting movable assets such as cattle, plant and machinery, equipment, livestock and crops, among others. Excerpts:
The Collateral Registry Act and the Credit Reporting Act are two significant legislations that were signed into law by the acting president, which are in line with your objective to create more jobs, especially through MSMEs. We would like to know the level of the central bank’s involvement in these legislations and how they are going to improve funding to MSMEs?
First of all, I resumed at the CBN on June 3rd 2014 and two days after that, I addressed a world press conference whereby I highlighted all the objectives I would love to achieve after five years on that position. And one of them was to ensure that MSMEs are able to access credit. But for them to access credit, we found out that there was a need to put in place a legal framework that makes it easy for them to access credit through the provision of movable assets as collateral. In the world today, there are over 400 million SMEs and about 50 per cent of them are either un-served or are underserved. And when you talk about financing, from the data that we have, less than 14 per cent of them have access to financing. But if we all recognise that the private sector and by extension, the SMEs are very important drivers of growth in any economy, then it is important that any economy that wants to witness sustainable inclusive growth must take SMEs very seriously and ensure that they are able to access finance. That is what we have tried to do since 2014 by working with the International Finance Corporation (IFC), an arm of the World Bank, to sponsor the bill on the Collateral Registry. I am delighted that, that bill has been passed into law and has also been assented by the acting president. We are very delighted. What that does is that it provides a legal framework under which banks can lend money to the SMEs. Even the Banking Act provides that when you lend money, particularly to SMEs, it is important that you obtain collateral. Banks would naturally not lend without taking collateral because of the perceived risk of either non-performance or arising from business failure. So, since the banks are in business not to lend their own money, but depositors’ money, they would want to be sure that whatever money that they lend to any person or corporates, are secured. Understandably, they (banks) could lend without collateral to the large corporates because they would have done very serious cash flow analysis and come to the conclusion that the large corporates, even if they face challenges, would still be strong to continue in business, whereas for the SMEs, there is the high propensity that if there is failure in a business transaction, the business may die. That is the reason banks would naturally ask for collateral. So, judging from the regulator’s standpoint, it is understandable that the banks must ask for collateral. But some SMEs don’t have fixed assets like buildings and land that the banks can hold on to as collateral in the event of business failure. So, the idea of movable collateral makes it easy. If you have a car, you can register it through the registry and the bank would take the car as collateral, register it in the registry. The registry would assign certain code numbers, which give that bank exclusive charge over that car, so that in case there is failure, they can possess the car and with the legal framework in place, they would be able to sell the car to realise what they lent out as loan. Similarly, if you are a hairdresser, the bank can take the hairdressing equipment, if you are a mechanic, they can take your mechanical tools, or any kind of business.
In any case, I know that the SMEs are not unwilling to provide the collateral. It is just that the banks want to be sure that there is a legal framework that secures them. So, I believe that with the law, banks are going to be further encouraged to loan to the SMEs. Of course, this will not go without some form of awareness. The next round of engagement that would take place is that the central bank and the banks would start some form of engagement and campaign for the SMEs to access loans through the framework created by the collateral registry. I believe once that is done, we would see the sustainable and inclusive growth that we are looking for. In Nigeria, we have close to 40 million SMEs. For us to be able to provide jobs for people, we need to encourage the SMEs to be able to access finance. I think with the kind of campaign that the CBN would begin to engage in, it would help to spur lending to SMEs.
The other bill that was signed into law is that of credit bureau. You will also observe that in the 80s and 90s, we started to witness high levels of non-performing loans. As a trained credit officer, even in the 80s when there were no credit bureaus, what we used to do was to carry out credit checks on a potential borrower. We write the credit checks to another bank. We ask the potential borrower to list the bank he or she has accounts or the bank(s) that the customer owed previously. Those banks would respond, but sometimes they don’t respond because there was nothing that compelled them to respond to those enquiries. As such, we said there is a need for us to have credit bureaus whereby when you loan money, all the
loans above N1 million, must be registered at the bureaus. It started with the Credit Risk Management System which was established by the central bank and presently we have a couple of other credit bureaus. And what the central bank prescribes is that before a bank can loan money to any person, it must conduct a credit check. Conducting a credit check means to look at the central bank’s Credit Risk Management System, and two other bureaus and they must make sure that the loans in those banks are performing. If those loans are not performing, of course the bank would have to take a decision whether they want to grant the loan or not. But what the regulator expects is that if somebody has taken loan from a bank and that loan is not doing well, what a right-thinking lender would do is not to grant that loan unless the customer settles the loan he had taken from Bank A previously. I think it will also help to increase our credit discipline. There are people who are perpetual debtors in the sense that they take loans and they don’t want to repay. They move from one bank to another, deceiving bankers and collecting loans. So what the Credit Reporting Act does is to ensure that banks are able to see their customers’ credit history. If it is good, the bank would be encouraged to lend and if it is bad, the bank would encourage the customer to go and clear his bad credit history before they can lend, or they would just outrightly refuse to lend to the customer.
While we understand the need for the two legislations, there are still concerns that high interest rates still serve as a deterrent for businesses and there might still be a high risk of default if the rates are high.
I truly agree that there is the need to ensure that interest rates are low, so that not just SMEs, but businesses generally can access loans at reasonably low interest rates so that they can be profitable and remain in business. On this, I agree with you. Again, if you read my vision statement in 2014, I said during my five-year tenure, we would try to make sure that the interest rate is brought low. But of course, there are certain things that have made it difficult for you to achieve some of those objectives in the immediate term. But I can assure you that in the medium to long-term, we would eventually achieve a low interest rate regime. Right now, it is a matter of what do you do. For instance, at a time when inflation in Nigeria moved from a low of nine per cent in January 2016, to as high as 18.7 per cent in nine months? Also, what do you do when there is need for you to see that you have to manage the exchange rate? Indeed, we conducted some surveys and we know that low interest rates are desirable, just as you would want a low exchange rate, and that is understandable. But given a choice as to which one people would prefer, if they must choose one, the survey that we conducted showed that most businesses preferred low foreign exchange to do their business. Generally, even in economics, the economics of interest and exchange rates tells us that both move in an inverse direction. That is, if you want a low exchange rate, particularly under a regime of high inflation, then you do not have a choice other than to adopt a somewhat tight monetary policy. So what we are trying to do is to say because inflation rate had gone as high as 18.7 per cent and exchange rate remained high, we tried to keep the exchange rate as low as possible and at the same time, for you to reverse the upward trend in inflation, you needed to adopt the type of tight monetary policy stance that we adopted.
But what the CBN has done, supported by the CBN Act that gives the Bank the mandate to go into development finance, was to set up the N220billion MSME Development Fund. Even before I got to the CBN, the Bank had a N300billion Commercial Agriculture Credit Scheme (CACS). The CBN also has the Agriculture Credit Guarantee Scheme. These three products are essentially meant to provide loans, not only to big businesses, but particularly for small businesses to be able to access loans at not more than nine per cent. We considered that as long as you are an SME or you are in the agriculture sector, you should be able to access loans at single-digit interest rate so that once you deploy that loan, you can achieve the level of productivity or performance you are targeting. That is what we have done. In the interim, while we are trying to manage the exchange rate, control the rate of acceleration of inflation, we decided to provide a window where MSMEs can access funds at low interest rates either through the MSME facility or the CACS. Indeed, I would say it is yielding fruit. For instance, under our Anchor Borrowers’ Programme, the CBN in 2016 lent close to N30 billion to primary farmers of rice particularly and other agricultural produce. And I must say this has yielded tremendous results. We have seen an addition to the quantity of paddy (rice) being produced of almost two million tonnes in one year. The central bank will remain aggressive and those disbursements would continue to be intense to see to it that as a country, we must provide food for our people. Nigeria is one of the very few countries in the world with a population of over 100 million people that cannot guarantee food security. And if we expect that the population of Nigeria would hit 250 million by 2020 or 450 million by 2050, we as leaders do not have a choice but to make sure that we put on the front burner the mandate of achieving food security for our people. We must do so because in doing so, we create jobs and in doing so, we protect them and ensure that when they produce, those goods are taken off them so that they can go back to the farm again.
The next phase that the CBN would be going into is on how the central bank can directly contribute towards creating jobs for our teeming youths. I keep recalling with a sense of nostalgia that when I went to the university, most of who went to the universities in the 60s, 70s and early 80s, in our third or fourth year, you had the banks and other corporates coming to interview final year students for jobs. You had high profile legal firms going to law faculties of universities to interview brilliant final year students. The purpose of this was just to provide jobs for them. As they are completing their NYSC, they went straight to their jobs and with that, they could live a meaningful life. I came from a background where what my parents said that they would do for me was to give me an education and that after giving me the education, they would have done everything for me. And I am happy that my parents gave me the education, because that is what has taken me to the level that I attained today. But you and I, our children are today in the university; can you tell your child today that after finishing university that is all you can give to him or her? My answer is no, you can’t. Today, a child finishes, even with a first class or second upper class degree, he comes out and there are no jobs. That child wakes up in the morning and looks up to you for pocket money. That is the challenge that we face today. As a graduate, my parents felt that after they educated me, I could get a job, I could married, buy a car and take care of my family. But can we tell our children that today? You can’t. You send the child to the university, you will look for a job for the child and in fact, when the child is marrying, you may be the one to sponsor the marriage, find an apartment for that child or even buy a car for that child. Is that the Nigeria that we want? I keep saying it with a sense of nostalgia that I saw it when it was good in this country and I am seeing it now. My children did not see it when it was good, so what they are seeing today, as far as they are concerned is normal. We, as today’s leaders must work very hard to reverse the current trend to when it was good. If we don’t and we do not take unemployment very seriously, you would find out that we are just sitting on a keg of gun powder. We must provide jobs! What the central bank is going to do is to ensure that we become more aggressive in our interventions. One area that we are going to be more aggressive is in agriculture. I have told my colleagues to carry out a study to carry out a census of graduates in various fields, particularly agriculture, see how we can take them in clusters. If we are able to find access to land, we can encourage our governments to build small homes inside these farms so that these young graduates can go into farming. We would give them some stipends, give them the seeds, the fertilizer and agricultural implements that they need. We would provide with them training from the agriculture ministries at both the state and federal levels. Then, what is important is that when they produce the agriculture products, the products must be taken off them under an arrangement where they can make money and continue their livelihood in that agriculture business. I know it is going to be a daunting assignment but we would try as much as possible, in collaboration with the government, to create an environment where companies would want to go to the universities to employ first class graduates.
What is the role of the IFC in creating the National Collateral Registry and can members of the public start assessing this registry?
The IFC has always collaborated with central banks in different parts of the world, particularly developing countries to create awareness and even in some cases work with the central bank in preparing the bill and seeing to it that the bill is approved. So, that is where the role of the IFC begins and stops. I must say that it has been tested in different parts of the world. In Kenya, they use cattle as collateral under the collateral registry arrangement. In Ghana, they also use different movable assets as collateral. Now, about how they access it, I think it starts first with the banks. So, because there is now a legal framework for them to accept these movable assets as collateral, if as an SME, you go to your bank, you should be able to provide your cattle as collateral and they should be away it should be registered. In the case of a car, if you bring a new car, it is going to be assessed. If it is worth N5 million, they would value it and decide to give you a loan of N2.5 million. The important thing is that it affords you an opportunity to have credit.
With the credit bureaus, does it mean you will have a central database, which all lenders can access to see the credit history of any individual?
Yes, the CBN has the Credit Risk Management System which is a central database where any bank or lender can go and access the information about the credit history of a borrower or a potential borrower.
Talking about support for SMEs, I will like to find out if banks have started complying with the agreement reached at the last Bankers’ Committee retreat requiring them to set aside a fraction of their profit after tax annually to fund SMEs and how much has been contributed so far by the banks?
Yes you are very correct. At the Bankers’ Committee’s annual retreat in December 2016, there was an agreement that banks would contribute five per cent of their profit after tax into what is called the Agriculture and SMEIS Fund, that is the Agriculture and Small and Medium Enterprises Equity Fund. To date, we have close to N26 billion in that account sitting in the CBN. We have started engagements and we have told the banks and we at the CBN have also started our engagement with certain institutions. We are saying this is not going to be a loan, but like an equity fund, where for instance, if you want to go into large scale agriculture farming and maybe it is costing about N100 million and you have your own little equity. So if we do the viability and by way of equity what you have is like N10 million, the CBN may contribute about N20 million under a joint venture as shareholder in the business by the banks.
The next round of engagement that would take place is that the central bank and the banks would start some form of engagement and campaign for the SMEs to access loans through the framework created by the collateral registry… In Nigeria, we have close to 40 million SMEs. For us to be able to provide jobs for people, we need to encourage the SMEs to be able to access finance
What you must understand about the foreign reserves is that you must look at it like a current account. The balance would go up and come down, depending on deposits and withdrawals… I would not worry even if the reserves fell below $30 billion as long as we are achieving the objective of providing FX for those who need it for genuine business and that the FX is being sourced at a reasonably low price
(Cuts in) …I thought the Act (BOFIA) bars banks from holding more than 10 per cent in non-financial institutions.
Let me tell you this; that is not in the Act, but it is regulation. But when you are confronted by adversity, as in this case where we are saying we need to provide jobs for people and that some people want to go into business, but they don’t have either equity or loans, we are going to see how to make that possible. As the Bankers’ Committee, what we are saying is that we have an opportunity to contribute our own quota by taking five per cent of the profit after tax from the banks to deploy it to SMEs. I think it is a noble initiative that should be supported rather than being criticised, because it is all in an attempt to provide jobs and improve productivity and achieve economic growth. I believe before the end of this year, we would have a lot of projects we can deploy some of that facility into and we can begin to see that the Bankers’ Committee has contributed its quota towards achieving economic growth.
Have you recouped the monies you lent out under the Anchor Borrowers’ scheme?
I can tell you that a substantial portion of it went to Kebbi State farmers and about 53 per cent of it has been recouped and this was what was due for repayment. When you are granting these types of loans, they are not meant to be for six months even though you can say between planting and harvesting takes six months. So it is not about them not repaying, it is actually about the number of years you want to grant this loan. In my view, it should not be less than three years, so that they can continue plowing back the money into the farming business and after three years, I believe they would have made enough money to repay and continue the business. I think that is the way we should look at it and not expect that because from planting to harvesting is six months, then they must pay back in six months.
You have said you would like to see a convergence of the exchange rates happening on their own and right now we have seen the creation of so many FX windows. Are we expecting the CBN to create more FX windows in the foreseeable future and aren’t these going to cause more distortions?
First, I think it is important to understand the reason behind the creation of those windows. You would find out that when the CBN, in this case under the wholesale Secondary Market Intervention Sales ( SMIS) for instance allocates $10 million to a bank, you will find out that, that bank’s preference would be to allocate the FX to their large customers.
That was what we observed. And we began to say, what happens to the vulnerable, the SMEs, those who want to pay school fees and those who want to travel? So that was what necessitated the creation of those windows.
(Cuts in…) But by doing so you created different exchange rates?
No, there is no different rate. It is N360 in this case, both for the school fees, PTA or SMEs. What you find is that there are different people based on risk perception about the rate that they can afford and it is difficult to achieve a single rate. But what is important is that this was done in order to ensure that various sectors or sub-sectors of the economy are able to access FX for their business. And I am delighted that with what has happened today, nobody that is travelling can say he wants to travel but cannot access PTA or BTA; nobody today that wants to pay school fees and say he can’t access it; and no SME today can say he wants below $20,000 and can’t access it. So our happiness is that people are able to access the FX market rather than go to the alternative market, which is the parallel market. This is because when they go to the parallel market, they shoot up the demand in the parallel market, which is what primarily contributed to the high exchange rate in the market. Now, what we have done is to take them from that market into the official market at an exchange rate that is better than the rate they would have sourced FX if they had gone to the alternative market. So I would say things are working well.
You also talked about convergence. Yes, we set up the investors’ and exporters’ window and what that did was that it eliminated some of the sharp practices that we saw in the market. Everything is now done in the open and in a very transparent manner. If you want to sell your dollars, you offer the banks and the bank knowing that he has a buyer, matches you with the buyer and the bank makes only N1 spread. With the transparency that has been brought to that market, we have seen a lot of inflows into that market and rates began to converge. We are optimistic and what we keep saying is that we prefer to see a convergence southwards and that the level of convergence would be determined by the market, and I am so sure that would be achieved in due course. As much as possible, the central bank does not want to be seen to be having excessive control over the market. We can only come in based on our reading of the market, based on our understanding of what the exchange rate is, to come in to intervene as a player in the market. I am happy that demand and supply is helping to determine the market and is also helping to provide confidence as more funds are flowing into the market, which is why we are seeing the convergence in a southward direction.
But with your sustained intervention for about four to five months now, we have noticed that the reserves accretion has slowed down considerably.
What you must understand about the foreign reserves is that you must look at it like a current account. The balance would go up and come down, depending on deposits and withdrawals. And I think the monetary authorities actually deserve commendation that in spite of the aggressive intervention in the market, reserves are still being managed at between $30 and $31 billion. I would not worry even if the reserves fell below $30 billion as long as we are achieving the objective of providing FX for those who need it for genuine business and that the FX is being sourced at a reasonably low price. Of course, the size of the reserves is important, but I am saying that with the price of crude oil oscillating between $47 and as high as $55 per barrel and with the export of crude oil and Nigeria’s production stabilising considerably at this time, I think it is a good time for us to really intervene to correct the misnomer in the FX market and in the exchange rate management system.
Has the CBN cleared FX demand for wholesale invisibles such as dividend remittances and capital repatriation?
I would say practically all their needs have been met. I do not think there is any pent up demand again. You can talk about delayed demand and not pent up demand. But the point is that most of those requests have been met by inflows coming into the market. If for instance over a two-month period, we have seen close to $1.2 billion coming in through that (importers and exporters’) window, it means the $1.2 billion was used to meet the invisible needs.
There have been concerns about the health of the banks and financial system stability due to rising NPLs and impaired capital adequacy ratios. We would like to know the true situation of the banking system and if the CBN has done a stress test on the banks?
First, it is important that we all know that there is no need to grandstand about stress testing. The CBN under its current management does stress testing under different scenarios using the balance sheets, non-performing loans (NPLs) and other performance indicators of the banks on a regular basis and based on that we are able to determine, what advice to give and what action the bank can take. So, stress testing is a routine thing in the CBN today. It is not something we want to grandstand about because the process of grandstanding may create unnecessary noise that might create problem for the banking system. But aside from that, it is important for us to know that in the entire world, when there are global shocks, external shocks, beyond the control of anyone, there would be incidence of NPLs rising and you can go and check the data in any jurisdiction to ascertain that. But I think what is important is how the banking sector is prepared to absorb those shocks. The Nigerian banking industry I always say is one of the most regulated in the world today.
The standard practice is that the Capital Adequacy Ratio (CAR) that is meant to be kept by banks should be eight per cent, minimum. But in Nigeria, the smallest bank is expected to maintain a CAR of 10 per cent, while the large domestically Systemically Important Banks are expected to maintain 15 per cent as CAR, whereas the standard practice is eight per cent. So what we have done with this is to provide capital buffers for the banks to be able to withstand shocks. But of course there are internal guidance limits, when these rates go above your own internal guidance limits, people tend to make noise and say the institutions are weak. But I think the important thing to remember is that a lot of shock absorbers have been built into the system to ensure that the banks are either relatively well capitalised or have proper levels of liquidity to be able to run their businesses so that depositors’ funds are not in jeopardy. We are also working hard to ensure that some of the weak ratios are addressed in some of the banks. But for me, there is no cause for worry, there is no cause for concern and we would continue to work assiduously to see to it that we are able to manage the banks so that depositors’ funds are safe. That is our primary mandate and that is why we are doing what we are doing.
We noticed that despite several warning, the currency notes are still being hawked around across the country. What is the CBN doing to address this?
It is really unfortunate that this is happening. The volume of currency being produced by the Mint and given to the CBN to distribute is even higher than we have done in the past. But unfortunately, the propensity for our people to handle cash is not abating, rather it is increasing. And in a situation where we are still trying to see what can be done for our people to embrace the cashless policy; but you will find out that as the volume of cashless transactions increase, these kinds of unfortunate incidents would drop. The central bank has been working with the Nigeria Police to arrest people that hawk cash. That is one side. But I think what we can only do is to continue to encourage cashless transactions and to continue to see that we pump more cash into the market so that if you can go to your bank and get new notes, so that you do not need to go to a party and begin to think of buying new notes that you want to spray. Those are the kind of things that we at the central bank would work on. For me, it is not just about arresting people, but about making sure that new cash is available in the banking halls.
But why did the central bank recently reverse the nationwide cashless policy rollout? There are insinuations that the CBN took that decision because of political pressure.
No, the point is that we want to be sure that we do not financially exclude people. As a central bank, we must be seen to be financially including people. Nobody spoke with me; it is so unfortunate that people would read meanings into this type of thing. Nothing about that is true. What we want to be sure is if you are a cattle farmer in Maiduguri, if you are a goat farmer in Zungeru, if you are a rice farmer in Kebbi, a fish farmer in Bayelsa, or a cassava farmer in my village in Delta State, you should not be financially excluded by virtue of the regulations. Otherwise, you drive more people out and they would continue to keep their monies under their pillows. We need to encourage them to bring the monies into the banking system.
We found out that the level of penetration of infrastructure needed to drive cashless has been very slow. We need PoS terminals, ATMs, internet, mobile banking and others. But their level of penetration has been very slow. If that is so, there is nothing we can do because we want everybody to be financially included. That was why we decided to restart the campaign and to encourage the banks to invest more in the infrastructure that is required and once that is achieved, we can go back to the cashless policy.
The Senate recently urged the CBN to convert lower currency notes to coins to be used side-by-side the higher currency notes. Is that something you are considering?
As a central bank, we would look at its feasibility.