A Workshop Program Designed for SMEs Bob Trojan and Adalberto Elias NatLaw September 16 th & 17 th , 2019 1
Situational Perspective: Background/Current State of the Secured Transactions Order (STO) Framework and the Collateral Registry Adalberto Elias 2
SME Lending Why is it important? Successes in other economies 3
SME Finance Gap There are 400 million only 14% SMEs in developing countries have a loan or line of credit 50% are unserved or underserved Source: World Bank Group 4
SME Finance Gap Source: World Bank Group 5
Secured Transactions Systems Accou ounts ts Invento tory y and Receivabl ivable Raw Goods ods Bank nk Intelle ellectual tual Property ty Accou ounts ts Rights hts Vehic icles les Indus dustrial trial and d Agric icultura ultural l Equip uipment ment Agric icultur ltural al Durabl able Consum umer Goods ds Produc ducts ts 6
Collateral Gap Mismatch between assets owned by companies and collateral required Capital Stock of Collateral Taken by Financial Firms Institutions Vehicle/ Land/ Machinery/ Movable Real Estate Equipment Property 22% 27% 44% Accounts Receivable Land/ Movable 34% Real Estate Property 73% 78% Source: World Bank Group 7
Why are financial institutions not willing to take movable property as collateral? Because there is a lack of Legal framework Registry of security interests in movables Interests Know-how on movable asset lending 8
Benefits of a Solid Secured Transactions System Increases access to credit reducing the risk of credit Reduces the cost of credit Increase market competition Promotes credit diversification 9
“Collateral Registries for Movable Assets: Do they Spur Firms’ Access to Finance?” -3 +7 +8 +10 +6 Percentage points Percentage points Percentage points Percentage points Months WORKING INTEREST ACCESS ACCESS LOAN CAPITAL RATES MATURITY TO TO FINANCED LOAN FINANCE BY BANKS Study also provides evidence that the impact of the introduction of movable registries on firms’ access to finance is larger among smaller firms , who also report a reduction in subjective, perception- based measure of finance obstacles. 10 Source: World Bank Group
Potential Effect in Secured Transactions Improved legislative framework governing secured transactions which is more transparent, efficient and comprehensive. New registry with robust platforms, proper capacity and wide usage. Increased capacity of financial institutions to design and offer new products where movable assets are used as collateral. The end result would be greater access to credit to SMEs, more jobs created and increased competition in the financial marketplace. 11
Principles for Effective Secured Transactions Broad scope Enforcement Creation Effective Secured Transactions System Publicity / Priority registration 12
Doing Business “Getting Credit” Indicator Borrowers and Creditors Right Index (0-12) 6 OECD 6.4 Europe & Central Asia 6.6 East Asia & Pacific Latin America & 5.3 the Caribbean 4.6 South Asia Sub-Saharan Africa 5 Middle East & North Africa 2.2 Low High Source: World Bank Group 13
Global Collateral Registry Projects Colombia China • Implemented new Secured Lending • Legal reform was implemented in 2007 Law in 2013 and established new and Registry launched in 2008 covering centralized collateral registry in accounts receivable and leasing. March 2014. More loans registered in the first 6 More than 10.4 trillion dollars in • • months of implementation than in financing with accounts receivable the last 30 years. More than 445,000 (mostly for SMEs). Development of the loans registered for a value of more factoring and leasing industries. than US$ 1 trillion. Source: World Bank Group 14
Global Collateral Registry Projects Vietnam Mexico • Legal reform and new centralized • Law reform and new centralized online online registry, which launched in registry launched in October 2011. March 2012, has provided 675,000 loans to more than 354,000 SMEs and Over 150,000 loans have been • 20,000 micro-enterprises. registered for a total secured amount estimated at over USD$200 billion. Total volume of financing through Loans secured with movables have • the registry is US$ 27 billion. grown fourfold. • 45% of the loans to the agricultural sector and 95% to SMEs. Businesses have saved US$4 billion in fees. Source: World Bank Group 15
Ghana: Impact on SMEs - Supply Chain Finance Developed a local supply chain for big mining corporations, through local SME service providers • More than 100 local SMEs have received more than US$ 10 million. Created hundreds of new jobs. SMEs use movable assets (contracts, receivables, equipment) as • collateral. No defaults in the 30 months that program has been operating. • Number of loans registered 77,500 Value of loans registered US$ 20 billion Number of SMEs 8,000 Number of microenterprises 30,000 CAL L BANK: : 25% inventory and receivables Purchase se Financin cing g Collateral by type 20% household goods Schem eme e for Gold ld Minin ing 19% vehicles Source: World Bank Group 16
The Art of the Possible New Financial Products for SMEs Overview 17
Enabling Framework Lending Products Borrowers Lenders Secondary Bank Platforms Market Regulation Legal Enforcement Registry Framework 18
Movables Finance Matrix FINANCIAL INFRASTRUCTURE Financial Leasing Consumer Financing Equipment Financing TITLE TRANSACTION Factoring Merchant Financing Inventory Finance COLLATERAL REGISTRY Accounts Receivable Financing Supply Chain Finance ABL: Secured Lines of Credit POTENTIAL LAWS CREDIT ENFORCEMENT PRODUCTS Warehouse Receipt Financing SYSTEM Securities Lending Others Equipment Raw Materials Motor Vehicles Inventory BANKING SECURED TRASACTION REGULATION Negotiable Cash Accounts Receivable Bank Deposits Instruments SECONDARY LAWS Warehouse Receipts Bills of Lading Letters of Credit Securities MARKET POTENTIAL COLLATERAL Fintech & Digitized Other Credit Card Receipts e-Payments FINTECH & Assets TRADING PLATFORMS Informal Enterprises Micro-Businesses Consumers POTENTIAL BORROWERS SMEs Corporates Special-Owned Business 19
Movables Finance Matrix FINANCIAL INFRASTRUCTURE Financial Leasing Consumer Financing Equipment Financing TITLE TRANSACTION Factoring Merchant Financing Inventory Finance COLLATERAL REGISTRY Accounts Receivable Financing Supply Chain Finance ABL: Secured Lines of Credit POTENTIAL LAWS CREDIT ENFORCEMENT PRODUCTS Warehouse Receipt Financing SYSTEM Securities Lending Others Equipment Raw Materials Motor Vehicles Inventory BANKING SECURED TRASACTION REGULATION Negotiable Cash Accounts Receivable Bank Deposits Instruments SECONDARY LAWS Warehouse Receipts Letters of Credit Bills of Lading Securities MARKET POTENTIAL COLLATERAL Fintech & Digitized Other Credit Card Receipts e-Payments FINTECH & Assets TRADING PLATFORMS Informal Enterprises Micro-Businesses Consumers POTENTIAL BORROWERS SMEs Corporates Special-Owned Business 20
Types of Lending with Movables 21
SME Financing SME Inventory Financing Finance Supply Financial Chain Leasing Finance Asset Based Factoring Lending 22
SME Cash Cycle / Collateral Purchase Raw Payment Materials Sale of Transformation Product Process 23
The Art of the Possible New Financial Products for SMEs Factoring 24
Factoring LEARNING OBJECTIVES Focused objective is to gain a firm understanding of factoring and enhance skills, in order to sell, utilize and process factoring transactions in line with established standards; Equip participants with sufficient knowledge to understand and avoid operational risks involved in invoice financing; Provide micro lenders and banks and their clients with a sound understanding of factoring principles, allowing them to better structure trade transactions, improve risk assessment skills and identify opportunities where factoring could be utilized as a financing tool to facilitate the optimization of clients’ trade activities. 25
Factoring LEARNING OUTCOMES At the end of the training, participants should be able to: Gain knowledge on factoring and how it works; Gain deepened understanding on why businesses factor; Gain understanding on what factors look out for before signing clients on; List the factoring process and explain the techniques to establish productive factoring relationships. 26
Factoring 27
Factoring What is factoring? How does it differ from commercial lending? Who are sellers in this context? Who are clients in this context? Who are account debtors in this context? 28
Factoring " refers to: the outright purchase and sale of accounts receivable (A/R) invoices at a discount from their face value. the structure, terms and conditions of such a transaction may vary in any number of ways, as evidenced by the array of factoring programs currently available. 29
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