Financial inclusion for small businesses - Freedom to borrow
Charles Shapiro, Guest Writer
Across the Caribbean and Latin America, small businesses complain that they cannot get loans, and when they can, the rate of interest is often crippling.
In Jamaica, the average loan to small- and medium-size enterprises (SMEs) are at rates of about 18 per cent, if they can get a loan. That is a big 'if'. Worldwide, 75 per cent of small-business loan applications are rejected, most for 'insufficient' collateral.
This is the credit trap for most small businesses in Latin America and the Caribbean: more than 70 per cent of small-business capital is moveable property, that is, machinery, inventory, fixtures, crops, and accounts receivable.
Yet, these valuable assets cannot be used as collateral because of outmoded laws that recognise only real estate and motor vehicles as collateral.
Countries with growing economies, such as Romania, China, Vietnam and Bosnia, have modernised their laws to allow businesses to use all their assets as collateral, not just real estate.
Small businesses in countries with modern laws on collateral are able to get larger loans, longer repayment periods, and lower rates of interest.
That means more small businesses will be successful. Successful small businesses in turn bring more jobs and more economic growth to a country. An ideal situation.
Secured transaction reform requires a package of changes:
- Passage of legislation to permit using moveable assets as collateral.
- Establishment of a transparent and accessible public registry of the assets that borrowers have used to guarantee loans. The registry should be inex-pensive and easy to access.
- Legal changes allowing a lender to seize assets expe-ditiously if the borrower does not repay the loan.
In 2002, the Organisation of American States (OAS) adopted model legislation on secured transactions, and in 2009 it approved the regulations necessary to implement the laws.
The OAS encourages member states, such as Jamaica, to adopt the Secured Transactions Model Law and Registry Regulations because their enactment "will significantly reduce the cost of loans, facilitate international trade in the region, and assist small- and medium-size businesses throughout the hemisphere".
Obviously, it is up to the legislature of each member country to determine if it wishes to modify its laws. Unfortunately, the fact is that secured transaction reform is often seen as an esoteric legal issue with no champion advocating it.
No one gets excited about commercial law.
Yet, while the subject may be hard to understand, it is important for growing our economies.
Modernising these laws gives small businesses in every corner of the world a greater opportunity to thrive.
Small entrepreneurs are optimists by nature. These shopkeepers, farmers, and taxi drivers believe in the future. They believe in their countries.
They are convinced that if they work hard, they will improve their lives and future opportunities for their children.
Without modern laws to facilitate credit, small-business owners compete with a hand tied behind their backs because they cannot use all their assets as collateral.
It is time to democratise credit in every country in our hemisphere and give hard-working small businesses a fair chance by enacting secured transactions reforms.
Ambassador Charles Shapiro is senior adviser to the United States secretary of state for economic initiatives in the Western Hemisphere.