Reform Area: Access to Credit

Legal framework to support use of movable assets
In the last “Strictly Business” we had commenced a discussion on the general role that movable assets can play in bridging the credit gap that is often cited as one of the leading constraints to growth of Micro, Small, and Medium-sized Enterprises (MSMEs).
Source: International Finance Corporation (IFC, 2015)

In particular, the access to credit impediment is quite often tied to MSME’s lack of real property (real estate) that most financial institutions prefer to hold as collateral. Estimates show that, on average, real estate makes up more than three-quarters of the required collateral asked for by financial institutions; however, this class of asset, typically, comprises only about one-third of a small business’s assets.
The remaining two-thirds of an enterprise’s assets is often made up of tangible and intangible movable assets such as inventories, equipment, accounts receivables, livestock, stocks and bonds, to name a few. Consequently, it was only a matter of time before various economies, especially more developed ones, started expanding collateralization options for lenders by modifying the financial infrastructure in such a way that the utilization of movable assets became, not only desirable, but also doable.

Legal Frame for Movable Assets
However, the creating of the requisite financial infrastructure brings us to where the discussion on this matter becomes quite involved, as it requires the fostering of the apposite legal framework within which such a system becomes practical for both lenders and debtors.

In Jamaica, for example, the government, as part of their moves to establish a more business-friendly environment, passed the Security Interest and Personal Property Act 2013 (SIPPA). According to the Companies Office of Jamaica (CoJ), the new law, which came into force January 2014, “allows for the use of personal property as collateral and reduce the transaction cost of borrowing.” The list of assets allowed under SIPPA includes tangibles such as crops and livestock (including future crops and unborn livestock), “some types of stocks and bonds”, and even “intellectual property such as copyrights, trademarks, and patents.”

However, for any jurisdiction to implement such a system, the International Financial Corporation (IFC) points out that there are some key principles around which any secured transactions reform (STR) revolves. According to the IFC (2015), these include “protection of creditors via effective enforcement methods”; the creation of modern registry systems that gives notice of security interests; “scope and uniformity of security mechanism”; and the inclusion of after-acquired property as collateral.
Given the pivotal function of these principles, it is imperative that each be looked at more closely in their general sense, before any localized assessment is done. We look at two of these principles below in this article; the other central features will be underscored in subsequent “Strictly Business” columns.

Scope and Uniformity of Security Mechanism
Among the first key principle that ought to be considered in any discussion on adopting a framework conducive for the use of movable assets or personal property is the reduction of any “economic and legal uncertainty” as it pertains to any such transaction between a lender and a borrower.

The fundamental goal here is for the jurisdiction to streamline legal devices used to create security interests over movables by “replacing all existing devices with a single, unitary device” (IFC, 2015). This feature is most essential as it pertains to avoiding “priority disputes” among creditors. This is especially important in the event a debtor defaults and one or more of the legal devices used (including Bill of Sales) are considered superior to others used by other creditors who have claim to the same property. Therefore, instead of ameliorating risks faced by the creditor, a fragmented system with multiple, confusing and competing security mechanisms does just the opposite.

After-Acquired Property
Another element that is fundamental to the institutionalization of any modern secured transactions law is the establishment of a structure that allows for the enforcement of After-Acquired Property clauses, which generally ensures lenders that assets acquired by the borrower after he or she has entered into an agreement with the creditor be included in the debtor’s liability.
The After-Acquired property provisions become especially significant in the event the original asset in question is replaced as is to be expected with movables such as inventory “or the replacement of equipment”.

About the EDC
The Economic Development Council (EDC) serves as the principal liaison body between the public and private sectors, and is designed to advocate for, plan, and coordinate the institutionalization of policy reforms that engender the business- and investment-friendly environment that is suitable for Belize’s private sector development and overall economic growth. The EDC executes its function by maintaining constant and open communication with both sectors via its technical unit, the Public-Private Sector Dialogue, which is housed in the Office of the Prime Minister.

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