Several countries in Africa have made significant progress in making their systems more efficient by revamping their system of recording security interests in movable assets and creating a meaningful non-judicial enforcement mechanism. In the largest of these countries, Ghana, the results have been significant: an additional 70,000 loans were provided to small- and mediumsized enterprises (SMEs) in the wake of statutory reform, with over US$14 billion of movable assets used as collateral.
It is too soon to see if these reforms will bring similar results in Liberia and elsewhere, but the experience in Ghana serves as an excellent example to other governments in Africa of the key role the reform of secured lending systems plays in unlocking the potential of SMEs and thus the national economies and the economy of Africa as a whole.
There is much opportunity for continued growth of the African economy. For example, the Sub-Saharan economies have grown at an average annual rate of approximately five percent for the past 15 years, although the growth rate is beginning to slow down. The commodity-driven boom and the accompanying 'Dutch disease' are partly to blame for this slow down as the demand for commodities has declined with the slowdown of the Chinese economy. A lack of meaningful industrialization fueled by poor infrastructure development is also to blame. Unfortunately there is a large funding gap for Africa’s rapidly growing SMEs, which, amply supported, could become the drivers of the new African economy.
The ability to own and freely transfer ownership interests in both immovable and movable assets is a fundamental precept of modern and stable economies. Closely related to this economic reality is the ability to use these ownership rights as collateral to borrow money. Indeed, the ability to create, recognize and enforce security interests over movable assets is essential for access to secured lending, which is a critical ingredient for economic development and growth. In many African countries it is difficult to create recognizable security interests in movable assets at the moment, however, addressing this issue will allow for copious growth opportunities.
Currently, many jurisdictions in Africa have fragmented financial systems which makes it difficult to determine creditor priorities. In certain countries the registries are complex, while in others there is no publication of security interests. As a result, in many African nations, the lack of an efficient system for creating security interests in movable assets is blocking the receipt of essential and available capital. For 80 percent of the SMEs in Africa their only assets, and thus their only collateral, are movables. Indeed, in the countries we discuss herein, the only enforcement mechanism available to lenders willing to advance capital is judicial enforcement, which is often not feasible in the fast-developing commerce of Africa.
Only 20 percent of Africa’s SMEs have access to capital, it is estimated that this funding gap is approaching US$200 billion. Although investment capital is bountiful for the Africa region, a lack of recognizable systems for investors has largely contributed to this gap. As bank and non-bank lenders are going to advance capital in a meaningful way only if there are systems in place to protect their investments, it is advisable that other African countries follow the Ghanaian example to attain similar remarkable economic progress.