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Credit Access to SMEs in La2n America
Some lessons about ins2tu2onal building
Ignacio De Leon, Ph.D.
Presented at the Law & Development Society Workshop, Faculty of Law, University of Toronto, March 9, 2011
THE PROBLEM Why should developing countries reform their ST laws?
Why collateral is important?
• US: movables property account for 60% of small-‐business capital stock. The asset-‐based industry has increased 40-‐fold since the mid-‐1970s. This industry has grown 12% annually over the last decade
• OECD countries: Borrowers with collateral get 9 2mes as much credit as those without it. Longer repayment periods (11 2mes as long) and lower interest rates (up to 50%)
• Eastern & Central Europe: Law reforms in Slovakia (2002) more than 70% of new business credit has been secured by movables. Credit to SMEs has increased by 10%. In Albania, interest rates fell by 5% since 2001 law reforms
Gross Domes2c Investment in Developing Countries vs. other sources (2005) (US$ billion)
-‐500
0
500
1000
1500
2000
2500
3000
Actual gross investment Loans by IFIs Foreign Aid
H. Fleisig, “The Economics of Collateral and Collateral Reform”, in Secured TransacEons Reform and Access to Credit (F. Dahan, Simpson eds), Edwad Elgar, 2005
Access to Finance (% of firms)
0
5
10
15
20
25
30
35
Low income lower middle income Upper Middle Income High Income
World Bank database
Access to Finance (regions)
0
5
10
15
20
25
30
35
40
45
50
Africa East Asia & Pacific Eastern Europe & Central Asia
La2n America Middle East & North Africa
South Asia
World Bank database
Percentage of firms who did not apply for loans because of collateral requirements
0
5
10
15
20
25
30
35
Africa East Asia & Pacific Eastern Europe & Central Asia
La2n America South Asia OECD
World Bank database
Two tools of reform Credit informa6on registries or
bureaus • Informa2on sharing • Ex ante credit informa2on • Informa2on sharing helps
creditors assess the creditworthiness of clients
• Purpose: to measure the scope and accessibility of credit informa2on available through public credit registries and private credit bureaus and provides informa2on on coverage
Secured transac6ons and bankruptcy laws
• Control rights • Ex post enforcement
• Legal rights can facilitate the use of collateral and the ability to enforce claims in the event of default
• Purpose: to measure how well collateral and bankruptcy laws facilitate lending
Secured lending reforms complement former government lending policies
CREDIT BUREAUS AND REGISTRIES Credit informa2on ins2tu2onal building
Credit bureaus in La2n America: Overall Ok, but…
• 18 economies already have good systems • La2n America has the largest percentage of economies with systems that include data from u2li2es, retailers and trade creditors.
• However, 12 economies, most of them small economies or Caribbean island states, lack any kind of credit bureau (ex. Jamaica)
SECURED TRANSACTIONS LEGAL REFORMS
Iden2fica2on of interna2onal best prac2ces
Best prac2ces
• Where – OAS Model Law on Secured Lending
– UNCITRAL Legisla2ve Guide to Secured Transac2ons
• Goals – Unifying ST laws – Unifying collateral registries – Easing out-‐of-‐court enforcement
Unifying laws
• Broad scope of permissible collateral – Tangible and intangible property – Assets that do not yet exist – Changing pool of assets/no specificity
• Ease of Security Interest Crea2on – Formali2es should be kept to a minimum
• Clear and comprehensive priority rules – “First in 2me, first in priority”
Flexible defini2on of collateral is needed
• Ex. A computer sales company wan2ng to use its inventory as collateral where the law requires that each computer be iden2fied by serial number, color, weight and value. Using the inventory as collateral would be almost impossible—because any changes to it would have to be recorded at the registry or in the loan agreement
• Only 15 La2n American countries (out of 32) allow a general descrip2on of assets
Priority to secured creditors
• Eastern Europe and Central Asia: 69% of countries give the highest priority possible in bankruptcy to secured creditors (including, in several cases, priority over labor and tax claims).
• Middle East and North Africa: 16% of countries
• La2n America and the Caribbean: Only 9%
Unifying registries • Why?
– A centralized collateral registry provides objec2ve informa2on on whether assets are already subject to the security right of another creditor
– It also helps clarify priority among creditors – Peru (before 2006 law reform): 20 types of security interests, 17 registries – Mexico: Non-‐possessory pledge cannot be effec2vely used because of the lack
of a centralized registry system • Features
– Online access for registra2on and searches – register almost all types of assets as collateral, regardless of the nature of the
par2es involved; – establish clear parameters for priority; – maintain a central database searchable by the debtor’s name or a “unique
iden2fier.” – Once registered, security interests immediately have effect against third
par2es.
Easing out-‐of-‐court procedures
• Court procedures are lengthy – Only 14 Latam countries (out of 32) permit out-‐of-‐court enforcement
– Peruvian Ministry of Economics and Finance: “In 2001 the judicial execu2on of a security interest took between 18 and 24 months”
– “If the creditor could recover the money within 3 months from the date of non-‐compliance, rather than 18 months, the applicable interest rate could come down to 3 %”
– Mexico: 1.8 yrs to complete a bankruptcy; recovery rate of 66.7 cents/dollar (bener than average in La2n America)
• Legal culture of Judges is geared against creditors
LESSONS OF SECURED LENDING REFORMS IN LATIN AMERICA
An overview of selected countries
Results: Peru
• One single reform (2006 law) • Thanks to the reforms, Peru’s ranking in the Doing Business Legal Rights Index jumped from 164 to 93 of 178 economies (World Bank, Doing Business, 2011)
• However, number of registries recorded is 10% less than a country with a Civil Law system with comparable development
• Only 4.5% of companies vs. 7% in Poland • Difference between savings and lending rates remains high (20%) on average since 2006
Problems with reforms: Peru
• Registra2on form is 3 pages long, must be signed by both par2es and notarized
• Value of the collateral and a descrip2on of the secured debt must be included The type of enforcement (e.g., public sale) in case of default must be indicated
• SUNARP (Registry) have 3 days for valida2on (in prac2ce, 2-‐4 weeks)
• Notaries must issue no2fica2ons to creditors whenever the collateral is transformed
• No online service
Results: Mexico
• Progressive legal reforms (2000 and 2003) • No single secured transac2ons law • Reforms follow the OAS Model Law
• Several asset based mechanisms (non-‐possessory pledge/ guarantee trust/ fixed asset loans, leasing, industrial mortgage, etc)
• Collateral registry (RUG) introduced in 2009 and effec2vely implemented in Oct 2010
Problems: Mexico
• August 2009 reform to the Commercial Code provides for a single registry for all security interests;
• SIGER is a commerce registry system for business en22es and security interests
• Un2l 2010 registra2on forms had to be signed by the creditor, notarized and verified by the registry (High costs: 17 days + fees -‐2% of the credit amount) Only 200 registries in 2010.
• Aqer 2010: Exclusive e-‐filers, elimina2on of one valida2on step at the registry office
Lessons
• Timing of reforms will take longer than expected: the poli2cal economy of reforms maners
• Alterna2ve sources of credit (gov./private) impact the development of secured lending ins2tu2ons
• Informality delays implementa2on of reforms
• Established legal tradi2ons maner
• Develop further regula2ons and guidelines • Develop allies to reforms in society
Access to Credit: A summary of the Legal Framework (Jamaica, Mexico and Peru)
Strength of Creditor Rights
