Financial Inclusion: Freedom to Borrow
Senior Advisor, Bureau of Western Hemisphere Affairs
"Small businesses are the backbone of our economy and the source of employment for many of our citizens. We must give them the chance to borrow larger amounts at lower interest rates with longer repayment periods if we’re going to make it easier for these enterprises to thrive." -Secretary Hillary Rodham Clinton
Across Latin America and the Caribbean small businesses complain that they cannot get loans. When they can, the rate of interest is often crippling. That is a big “if.” Worldwide 75% of small business loan applications are rejected, most for “insufficient” collateral.
Here’s the credit trap: In Latin American and the Caribbean more than 70% of small business capital is moveable property – machinery, inventory, fixtures, crops, and accounts receivable -- that cannot be used as collateral because of outmoded laws that only recognize real estate and motor vehicles can be used as collateral.
Countries with growing economies, such as Romania, China, Vietnam and Bosnia, have modernized their legislation to allow businesses to use all their assets as collateral, not just real estate. Small businesses in countries with modern laws on collateral 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. Sounds good, doesn’t it?
Secured transaction reform requires a package of changes:
- Passage of a 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 inexpensive and easy to access.
- Legal changes allowing a lender to seize the assets expeditiously if the borrower does not repay the loan.
In 2002 the Organization 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 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-sized businesses throughout the Hemisphere.”
Obviously it is up to the legislature of each country to determine if it wishes to modify its laws. 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. While the subject may be hard to understand, it is important for growing our economies. Modernizing these laws gives small businesses a greater opportunity to thrive.
Small entrepreneurs are optimists. 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. Let us democratize credit and give them a fair chance by enacting secured transactions reforms.