In most developing countries, small and medium sized businesses have difficulties obtaining loans and when they do, they generally pay much higher rates of interest than similar businesses in the United States. Better access to credit would allow more people to acquire assets, expand their businesses, and create jobs. This, in turn, will enable them to educate their children, strengthen their families, and improve the quality of their lives.
In the credit systems prevalent in almost all of Latin America, credit works like a pawn shop: the borrower surrenders the asset to the lender until the borrower repays the loan. However, in a modern, secured transactions system, the borrower can keep the asset to use it to generate income – which makes it easier for the borrower to repay the loan.
Take the example of an Argentine manicurist who has a steady clientele. She generates enough steady income in her business to repay a loan. What she needs is a way to "formalize" this income and use it as collateral, thus creating a guarantee that the lender can rely on to ensure repayment. This secured loan might enable the Argentine manicurist to rent better premises, to provide services to more clients, and to hire new employees.
A modern secured transactions system accepts all types of assets (other than real estate) as guarantees for loans including inventory, accounts receivable (particularly invoices), and equipment. The following steps are necessary to allow business to implement this system:
- Passage of a law to permit using non-real estate assets as collateral.
- Establishment of a transparent and accessible public registry of rights in the assets that borrowers have used to guarantee loans.
- Legal changes allowing a lender to seize the asset if the borrower does not repay the loan.
These changes will increase borrowers’ access to credit, reduce risk to the lender, and lower interest rates. The Organization of American States has agreed upon model laws and regulations that can be adapted for use in any country.
Secured transactions legal reform is a key to open up credit markets to small and medium-sized businesses. Some experts estimate that making the changes to permit secured transactions in Latin American countries, if fully implemented, could increase a nation’s economy by 8-10 percent within a decade.