Business

The Billion-Dollar Question: How to fill Belize’s SME Credit Gap? Part 4

Last week’s “The Business Perspective” looked at asset-based financing (ABF)’s ability to help address the access-to-credit constraint that we have been discussing for the past four weeks, especially as it pertains to the potential usefulness of movable assets and establishment of a secured transaction registry as measures to help narrow the SME’s credit gap.
The practicality of credit registries is also not lost on entities like the International Monetary Fund (IMF), whose September 2017 Article IV Consultation Staff Report advised that “access to affordable credit for farmers and SMEs could be enhanced by establishing a credit bureau and a credit/collateral registry.” The IMF also noted, “Legislation for the establishment of a credit bureau and credit registry is also under development”.

In 2015, the World Bank, one of the leading multilateral agencies assisting countries in the development such mechanisms, explained the benefits of credit registries:

“Modern Secured Transaction Laws and Collateral Registries have a dramatic impact on economic Collateral provides the basis for free-flowing credit markets, reducing the potential losses lenders face from non-payment,” they added. “While land and buildings are widely accepted as collateral for loans, the use of movable collateral (such as inventory, accounts receivables, crops and equipment) is restricted because many countries do not have functioning laws and registries to govern secured transactions. Reforming the framework for movable collateral lending allows businesses—particularly SMEs—to leverage their assets into capital for investment and growth. Modern Secured Transaction Registries increase the availability of credit and reduce the cost of credit.”

Recognizing both the utility and the fact that legislation for such registries is reportedly underway, it is helpful to underscore some of the more pertinent changes to the legal infrastructure that need to be made. The International Finance Corporation (IFC 2014), in its study for Belize, had enumerated these changes, which include the establishment of a Public Registry, and for the law to allow for proceeds to be used as secured collateral.
The Public Registry (or the Secured Transactions Registry) is probably the most apparent change, as it is virtually impossible to discuss establishing a system that uses movable collateral such as inventories or accounts receivables if there is not a mechanism that could alert third parties. The goal is to notify third parties as to whether or not there is any valid claim against the asset in question. As reported by the IFC (2014), “failure to make available notice may lead unwary third parties to purchase or lend against the collateral.”

A second requirement is for the changes in the law to allow for security interests to continue as collateral, even if the original asset that was used to make the loan was sold by the debtor. The “Proceeds as Collateral” legislative reforms are especially useful in the cases where assets such as inventories or agricultural commodities such as livestock or crops are utilized collateral. Naturally, this component works hand in with a well-functioning public registry.

Naturally, the aforementioned factors are not the only changes that need to be made. The IFC (2014) had also highlighted other changes that will be discussed in future “Business Perspective” articles. These include provisions for “Protection of Investors via Purchase Money Mechanism”, “Future Advances”, and, of course, “Effective Enforcement”.

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