Impact Story

CHALLENGE

 

The entrepreneurial environment in Seychelles is challenging: it is characterized by an inefficient regulatory framework and poor access to finance. Although the banking sector is well capitalized and enjoys high levels of profitability, which is mostly attributed to non-interest income earned on loans and advances and to investment in government securities, banks in Seychelles do not adequately engage in lending, especially to SMEs. This is partly explained by the lack of acceptable collateral. Banks accept only immovable property as guarantees on loans, thus effectively preventing borrowers from using movable assets such as inventory, machinery, accounts receivable, crops, and stock as guarantees. In addition, the lack of a collateral registry prevents the banks, NBFIs, and other potential creditors from using financial leasing as a means to channel credit to the private sector.

 

As a result, the ratio of private sector credit to GDP for Seychelles has been low, at 25.1 percent in 2012 against a 48.2 percent average for countries in the same income group. The lending– deposit spread in 2013 was 10.1 percent, against an average of 5.6 percent for the same income group. Moreover, the share of NPLs has stood quite high, at 9.4 percent in 2013 against an average NPL share of 3.2 percent for the same income group. The limited capacity for lending to the private sector inhibits growth.

 

In an effort to mitigate the challenges for small businesses, the government has launched the Small Business Financing Agency, which focuses on microfinance.

 

FIRST’S ASSISTANCE

 

Acknowledging the gap in lending capacity, the Central Bank of Seychelles (CBS) requested FIRST’s assistance in embarking on a comprehensive reform to put in place a modern secured lending system and a collateral registry for movable property. With secured lending, enterprises will be able to use their movable assets, inventory, and accounts receivable as collateral and will have greater access to finance.

 

FIRST’s TA, which was delivered by the World Bank during the course of 2014–1015, assisted the CBS in two efforts: reviewing and drafting a secured lending legal framework, including (i) reaching consensus among key stakeholders on the need for reform, (ii) reviewing current secured lending practices, and (iii) improving the enabling environment by drafting secured transactions laws and regulations in line with international practice; and designing and creating a secured transactions registry, including (i) assisting in the creation of the registry and (ii) supporting the CBS in creating awareness of the registry and providing training of trainers.

 

RESULTS

 

Following the project, the Secured Transactions Act was speedily enacted by the Parliament in 2015, and the Electronic Secured Transaction Registry/Collateral Registry was developed within the CBS and launched in 2015. All seven banks in the country are connected to the system. Although it is too early to measure impacts, it is expected that secured lending will expand access to credit for the private sector in Seychelles.