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Expanding SME Financing in Africa by Improving Secured Lending Systems

July 10, 2012

Sharing regional reform experiences can create momentum for greater use of movable collateral across the continent

Since 2007, Investment Climate and Access to Finance teams of the World Bank Group with the support of the State Secretariat for Economic Affairs of the Government of Switzerland (SECO) have helped the government of Ghana implement reforms that expand access to credit for firms, especially small and medium enterprises (SMEs), and encourage private sector growth.

In 2008, the Borrowers and Lenders Act came into effect introducing modern secured transaction system and laying the groundwork for the creation of a web-based collateral registry at the Bank of Ghana, the country's central Bank. As a result more than 36,000 loans were registered by banks and non-bank financial institutions in the collateral registry since its establishment in March 2010. These loans account for almost US$2 billion in financing secured with movable property. The program plans to expand access to financial services for about 3000 SMEs with a 30 per cent increase in registrations of secured loans by next year.

"The advice we received from the World Bank Group has helped us arrive at where we are right now. They showed us how to meet international best practice standards. As the registry grows, we expect that industries and SMEs will further grow, creating jobs and increasing the gross domestic product (GDP) of the country," says Mike Oppong-Adusah, Head of the Collateral Registry at the Bank of Ghana.

Paving the way for further reform in the region

Ghana, the pilot state for the WBG's secured transactions initiative in Africa, is a good example of how to successfully implement a functioning secured lending system. Other countries in the region are also keen on understanding and replicating the country's reform model. To facilitate these efforts and strengthen the reform momentum, the WBG recently organized a peer-to-peer learning event in Accra, Ghana's capital. During the three-day event, over 110 government officials, delegations from Central banks, and private sector representatives from 14 Sub-Saharan African―mostly Anglophone―countries actively exchanged ideas on best practices for the legal and institutional framework governing the creation, registration, and enforcement of security against movable assets as collateral in Africa. In addition, the WBG team shared experience from similar projects in other parts of the world, such as Mexico and China.

"This conference could not have come at a better time, considering the recent global financial crises and the current challenges in the Euro zone. These events have brought to the fore the need for countries, including ours, to put measures in place to strengthen and stabilize their financial systems. It is very important for us, as policy-makers in the financial sector, to continually share ideas on how to improve the credit delivery systems of our economies to ensure that the financial developments resulting from the various policy reforms we have embarked upon over the years translate into sustainable growth in the key sectors of our economies," said Dr. H.A.K. Wampa, First Deputy Governor, Central Bank of Ghana, in opening the conference.

Empowering female entrepreneurs

The Ghana experience also sheds light on how financial sector reforms can help empower women. During the conference, participants discussed ways women can benefit from the use of secured transaction systems and facilitated access to credit.

Michaelina Orleans-Linday, Risk Manager at Woman's World Banking in Ghana, confirms the impact of the collateral registries reform on women:  "Facilitated access to credit has impacted the role of women in society positively. It helps women expand their business and can be a contributing factor to increasing their economic power."  

Although specific loan products for women entrepreneurs are still limited when it comes to commercial banks, group-lending schemes have proven to be a good alternative. Also, women-owned businesses that have successfully managed to access finance overall have positive growth results. This in turn enables them to strengthen their business activities and role within society.

Positive outlook ahead

Exchange of experiences at the event have resulted in planning for further technical assistance initiatives, highlighting the need for secured transactions and collateral registries reforms across the African continent. Working with a range of public and private sector stakeholders in each country, future efforts are built on three pillars—improving the legal framework of a country, development of a collateral registry, and capacity building—ensuring both rapid results as well as deeper, systemic reforms.

Melchior Wagara, Deputy Minister of the Central Bank of Burundi, points out how lessons from different countries highlighted during the conference will potentially benefit his own: "The Ghanaian example will help my country a lot in implementing similar reforms. Apart from the interaction with representatives from other African countries, what was most interesting for me has been learning what steps my country needs to take in creating a best practice model for reforms, especially how to regulate business activities in the formal and informal sector of Burundi."