INTRODUCTION CAL BANK LIMITED 2

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1 CAL BANK LIMITED 1

2 INTRODUCTION In the past few years, Ghana has experienced a boom in the financial sector with more banks and other financial institutions being set up. Currently, Ghana boasts of about 26 banks besides other non-bank financial institutions. Most especially with the advent of the oil industry, there promises to be more financial institutions being set up. CAL BANK LIMITED 2

3 INTRODUCTION cont. CAL Bank plays an important role in the Ghanaian financial sector by providing total banking services to personal, commercial and corporate clients in Ghana. As an indigenous bank with an understanding of the challenges Small and Medium Scale Enterprises (SMEs) face within the economy, it strives to provide financial assistance to SMEs. CAL BANK LIMITED 3

4 SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) SMEs is a fast growing sector in Ghana which contributes greatly towards Ghana s economy. These are mostly managed by indigenes. SMEs and entrepreneurs play a key role in Ghana s economy accounting for about 90% of registered businesses in Ghana. A strong and vibrant SME sector will result in the creation of employment and economic growth. CAL BANK LIMITED 4

5 SMEs cont. To sustain and improve this economic growth SMEs in Ghana must be assisted to have access to finance. Finance is one of the main challenges of SMEs in Ghana. Most of these SMEs do not have a large capital base and therefore need financing in order to grow. CAL BANK LIMITED 5

6 CAL BANK & SMEs In order to benefit from local content laws a number of SMEs have strategically positioned themselves to gain contracts in the mining and oil industries. CAL Bank as a financial partner to these SMEs has designed a variety of credit facilities to meet the peculiar needs of SMEs. It offers term loans, Overdrafts, Bank Guarantees, Bid Securities among others to the SMEs. As at end of first quarter 2012, CAL Bank s SME to retail portfolio was 18%. CAL BANK LIMITED 6

7 BANKS/FINANCIAL INSTITUTIONS Banks make profit through granting of facilities. When borrowers perform on their loans, banks accrue more interest income thus increasing their profitability. However Non-Performing Loans (NPL) have a negative impact on the profitability of banks hence the need to take good security. CAL BANK LIMITED 7

8 BANKS/FINANCIAL INSTITUTIONS cont. Statistics indicate that, loan default is high in Ghana - NPL ratio deteriorated from 16.2 percent in December 2009 to 17.6 percent as at December This explains why banks are stringent in taking security; the preferred security in Ghana being landed property or immovable property. CAL BANK LIMITED 8

9 IMMOVABLE ASSETS AS SECURITY Banks in Ghana prefer this type of security because it does not depreciate in value; Another important factor in the preference of landed property as security is the fact that it cannot be moved - unlike in the case of movable assets which can be moved into hiding by the borrower to evade the bank from realising that security. CAL BANK LIMITED 9

10 MOVABLE ASSETS AS SECURITY CHALLENGES Banks in Ghana are confronted with a number of challenges when movable assets are taken as security for credit facilities advanced. In some instances when stocks and receivables were used as security; upon default by the borrowers when the banks moved to enforce the securities, they had realised to their dismay that the stocks were non-existent, the receivables had long been collected by the borrowers without their knowledge. CAL BANK LIMITED 10

11 MOVABLE ASSETS AS SECURITY CHALLENGES cont. In some instances where vehicles were used as security, the vehicle had been sold or had been hidden. Hence the preference of banks for landed property as security. The negative effect of this preference on Ghanaian SMEs is that, quite a number of them are therefore unable to source credit facilities from banks since most are unable to put up landed property as security. CAL BANK LIMITED 11

12 BORROWERS AND LENDERS ACT, 2008 (ACT 773) However, with the advent of the Borrowers and Lenders Act, 2008 (Act 773) the situation is gradually changing for the better for SMEs. The purpose of the Act is to among others improve the legal framework of credit and to improve standards of disclosure of information by borrowers and lenders. CAL BANK LIMITED 12

13 ESTABLISHMENT OF COLLATERAL REGISTRY A significant provision of the Act is the establishment of the Collateral Registry (CR) (Section 21) to register charges and collaterals created by borrowers to secure credit facilities provided by lenders (Section 22). In practice, registration is done on-line at a nominal fee. Various forms/templates are used in the registration process: CR1 - the registration form, CR2 - Application for full or partial release, CR6 - Notice of intention to realise collateral charged and CR7 - Registrar s notice of no objection to realisation. CAL BANK LIMITED 13

14 ESTABLISHMENT OF COLLATERAL REGISTRY cont. Time is of the essence in registering. The first registration of a charge has priority over any subsequent registrations of the same subject matter. The Act prescribes the procedure to be followed by the lender when the borrower is in default of payment. CAL BANK LIMITED 14

15 REALISATION OF SECURITY UNDER THE COLLATERAL REGISTRY Upon default, the lender sends a Notice of default in writing to the borrower demanding that the borrower pay the amount due within 30 days. Upon expiration of the notice period, if the borrower fails to make payment or satisfactory arrangement with the lender on payment, the lender can enforce his rights as provided by the Act in the following ways: CAL BANK LIMITED 15

16 REALISATION OF SECURITY UNDER THE COLLATERAL REGISTRY cont. Sue the borrower on any covenant to perform under the facility agreement; Realise the charged asset on notice to the person in possession of the asset. A significant turning point of this law is the new process introduced which simplifies the taking of possession by lenders of a charged asset (including mortgages). CAL BANK LIMITED 16

17 REALISATION OF SECURITY UNDER THE COLLATERAL REGISTRY cont. The lender can take possession of the charged property without initiating court proceedings to enforce its right of possession (Section 34). This law therefore gives lenders the right to take possession of assets charged to them as security without first having to go through the court system in order to enforce their possessory right. Unlike the old regime for instance under the Mortgages Decree, 1972 (NRCD 96) where a lender must initiate judicial action before he can take possession of a mortgaged property. CAL BANK LIMITED 17

18 REALISATION OF SECURITY UNDER THE COLLATERAL REGISTRY cont. A lender who intends to realise a security charged and registered by the CR without a court order is required to notify the Registrar of that intention 30 days after the date of receipt of the notice of default by the borrower CR6. Upon receipt of the notification the Registrar if satisfied then certifies the realisation process by issuing a Memorandum of No Objection - CR7 CAL BANK LIMITED 18

19 REALISATION OF SECURITY UNDER THE COLLATERAL REGISTRY cont. The asset to be realised without a court order is valued by appropriate professional valuers and the realisation is by public auction or any other means permitted by law. The only instance that a lender may involve the court is where he is unable to enforce his right of possession in a peaceable manner. In such an instance the lender may use the services of the police to evict the borrower or persons in possession pursuant to a warrant issued by a court. CAL BANK LIMITED 19

20 INFLUENCE OF ACT 773 & CR ON BANKS LENDING TO SMEs Act 773 has positively influenced banks in lending to SMEs. Currently under the CR, banks are able to register movable assets as security - stocks, vehicles, machinery, equipment and even assignment of receivables and contract proceeds. The CR system is such that upon registration of a charge, in the event of default; once the bank follows the steps as indicated in Sections 32, 33 and 34, the bank can then seize the assets, possess the assets, move into possession and or sell the assets through auction without having to go through the court system CAL BANK LIMITED 20

21 INFLUENCE OF ACT 773 & CR ON BANKS LENDING TO SMEs cont. The fact that searches are conducted in the CR protects the banks from the risk of taking movable assets which have already been wholly charged to another lender as security. Likewise it protects the interest of the bank which has registered its charge over the movable asset as security. CAL BANK LIMITED 21

22 INFLUENCE OF ACT 773 & CR ON BANKS LENDING TO SMEs cont. The advantage here is that now banks are more inclined to take movable assets as security than they previously did. Banks see the CR system as a much more secured system in protecting their interest in movable assets which have been charged as security. Realisation of security is also very timely. CAL BANK LIMITED 22

23 POSITIVE EFFECT OF ACT 773 & CR ON SME LENDING Creation of the CR has resulted in SMEs being able to access credit facilities from banks using movable assets as security which hitherto was difficult for them due to the preference of financial institutions in taking landed property as security. Resulting in growth of SMEs. CAL BANK LIMITED 23

24 POSITIVE EFFECT OF ACT 773 & CR ON SME LENDING cont. A classic example is the financing of SMEs providing services in the mining sector by CAL Bank. CAL Bank as a financial partner to these SMEs gives credit facilities to service providers within the mining sector. The credit facilities extended by CAL Bank to SME service providers within the mining industry enables them to provide services to the mining companies and to perform under contracts which have been awarded them by the mining companies. CAL BANK LIMITED 24

25 POSITIVE EFFECT OF ACT 773 & CR ON SME LENDING cont. This has helped to develop a local supply chain for big mining companies through local SME service providers. As a result, a number of Ghanaian SMEs have obtained credit facilities from CAL Bank using movable assets as security and are currently providing a wide range of services such as transportation, catering, repair and mechanic services to mining companies. Local SMEs have therefore been empowered financially resulting in the growth of their CAL BANK LIMITED 25

26 IMPLEMENTATION UNFOLDING Act 773 is quite new therefore a number of banks are yet to go through or have just about started the process of realisation of security. For the financial institutions that have gone through the realisation process, it has simply been smooth and they have been able to recover their money within a short time. As one financial institution official stated it is that simple. Recovery through the court usually takes years however, recovery through the CR system only takes at most a few months. CAL BANK LIMITED 26

27 VIGILANCE However in order for banks to reap the full protection of the CR system, they must be vigilant and not indolent. Banks should make it a practice of conducting searches in the CR before taking a charge over movable assets; this would enable them know whether that asset has already been charged as security to another lender. Since registration on line is real time, priority of security is based on the bank that registered first. Thus, it is in the interest of banks to timeously register movable assets charged as security on the CR since any delay on their part might jeopardise their interest. CAL BANK LIMITED 27

28 TEETHING PROBLEMS & QUESTIONS Just as any new system goes through teething problems; the banks in implementing the CR system are confronted with some teething problems. There are still some unanswered questions. Act 773 expressly states that the requirement of registration under the CR is in addition to the requirement of companies to register charges with the Registrar of Companies (Section 25(2)); and the requirement of registration under the CR does not affect the provisions of other enactment related to the registration of charges (Section 26(2)), the question is - what happens if a lender registers its charge in the CR but however fails to go through or complete registration at the Registrar of Companies or Land Title Registry? CAL BANK LIMITED 28

29 TEETHING PROBLEMS & QUESTIONS cont. What happens if a vehicle registered in the name of the borrower which is used as security and registered on the Collateral Registry is sold upon default of the borrower; however the borrower refuses to sign change of ownership form (DVLA Form C); how would the purchaser register its interest at DVLA? Likewise, would the presentation of CR7 and evidence of auction sale of an asset (movable/immovable) be acceptable documentation at the various registries for the purposes of registering the purchaser s interest in that asset? CAL BANK LIMITED 29

30 CONCLUSION It is my conviction that as we go through the process, with the input of all stakeholders, we would find the answers. CAL BANK LIMITED 30

31 THANK YOU References The World Bank Group. Assessed on 30/05/12 ive/artikel.php?id= Assessed on 29/06/12 Assessed on 29/06/12 CAL BANK LIMITED 31