BY CHARLES SHAPIRO
This article was posted by the Miami Herald on October 27
At the business meetings around the recent Ibero-American Summit in Panama, almost every speaker — presidents and cabinet ministers, business leaders, and development bank presidents — spoke passionately about the need to help small and medium-sized enterprises in Latin America.
While macro-economic growth is the single most important factor for reducing poverty in a developing country, by itself it is insufficient. According to Costa Rican Minister of Economy Mayi Antillón, 99 percent of businesses in her country are small businesses. Leaving small businesses behind while large businesses thrive is a recipe for political instability.
Helping SMEs makes good economic and political sense. But no one explains how.
The World Bank’s Ease of Doing Business report provides a comprehensive work plan for facilitating SME growth. The first step is to make it possible for Latin American SMEs to get commercial loans from banks. Not subsidized loans. Not risky loans. But loans based on a business’s assets.
Compared to SMEs in Latin America and the Caribbean, U.S. businesses have it easy.
Article 9 of the U.S. Uniform Commercial Code enables businesses to use as collateral any kind of asset a bank will accept, such as inventory, warehouse receipts, equipment, intellectual property and accounts receivable.
Not so in Latin America and the Caribbean where banks will only accept real estate and vehicles as loan collateral. SMEs, like all businesses, need working capital, but 70 percent of SMEs in developing countries do not own the land under their stores, restaurants and repair shops and cannot obtain commercial loans.
Micro-loans are great for informal micro-businesses with few assets, but micro-loans are too small to help SMEs that want to compete in the formal economy.
When countries modernize their laws so that banks can extend loans secured with assets other than real estate, then small businesses will be able to get larger loans at lower rates of interest. This type of small business lending, called asset based lending, is currently impossible in most of Latin America.
The Organization of American States has a model law and model regulations that countries can modify to fit their own legal system. The Inter-American Development Bank (IDB), the World Bank’s International Finance Corporation (IFC), and U.S. Treasury’s Office of Technical Assistance can provide the expertise and funding to countries to help reform their laws and set up the supporting financial infrastructure.
Once laws are passed, electronic registries of pledged collateral must be established. Bankers, lawyers and judges have to learn how to use the new system. Credit bureaus must be established, and small business development centers need to mobilize to provide credit and business management advice.
On Sept. 18-19 in San José, Costa Rica, the Institute of the Americas and the IFC held their second annual conference on asset-based lending. Eighteen countries from Uruguay and Peru to Mexico and Haiti met with technical experts, bankers and political leaders to discuss how to build political consensus to support reforms, understand what other actions are necessary, and to learn from each other. A Spanish representative was there to see what Spain could learn from Latin America.
There are success stories. Honduras established a system of asset based lending in 2011, with the number of loans in 2013 running 30 percent ahead of 2012. Mexico has the gold standard of electronic asset registries and records 5,000 to 7,000 loans per month. Colombian President Santos signed a bill into law in mid-August of this year and the new system will be running by March 2014. El Salvador passed a bill that awaits President Flores’ signature. Costa Rica has a bill pending before its Legislative Assembly. Jamaica, Haiti, Trinidad, Guyana, Panama, Peru and Guatemala are drafting bills or reforming existing laws so the system will function better.
Asset-based lending is not dramatic or sexy or even expensive. It’s the equivalent of “small ball” baseball — the many small actions that add up to a winning game.
Latin American governments can help their own SMEs prosper by implementing the laws that will facilitate their access to credit. Helping small business borrow at lower rates of interest will allow them to compete, expand and hire more employees.