World Bank team explores modernising credit laws

A mission from the World Bank recently began discussions with the government and other stakeholders towards adopting modern legislation that will allow customers to offer assets other than real estate as guarantees for loans.

The team, led by the Operations Officer at the International Finance Corporation (IFC) Pedro Andres Amo, left Guyana earlier this week. When contacted, Amo told Stabroek News that the purpose of the trip was “on a very preliminary stage, to establish contact with relevant institutions to test interests to cooperate in the area of the investment climate.” Another trip is expected to follow, he said. Amo explained that this initiative in the Caribbean is a collaborative effort with the Canadian Agency for International Development (CIDA).

The initiative is an attempt to have a modern secured transactions system become operational so that customers, especially small and medium-sized entrepreneurs could benefit from larger loans and longer payback periods.

When approached, Finance Minister Dr Ashni Singh declined to comment on the visit by the World Bank officials but said that the administration is open to considering all options for reforming and modernising the country’s financial system, especially as it relates to accessing credit.

Last Wednesday, Ambassador Charles Shapiro, of the United States Department of State, Rachel Shahid-Saless and John Wilson from the OAS, held a video conference with audiences from Guyana and Nassau, Bahamas.  The local participants were representatives from the banking community, private sector umbrella organisations and the media, who gathered at the US Embassy, which was the terminal for the video conference.

Ambassador Shapiro, in a press statement, said that “across Latin America and the Caribbean small businesses complain that they cannot get loans,” while adding that “when they can, the rate of interest is often crippling.” He said that in Guyana the average loan to small and medium-sized enterprises (SMEs) is roughly $6 million to $8 million. These loans, he said, are often crippling to the person who takes the loan.

Wilson, the Senior Legal Officer at the OAS, explained that coming out of the last G20 Summit held in Pennsylvania, several international agencies such as the World Bank, the Inter-American Development Bank (IDB), Organisation of American States (OAS) and  the US Agency for International Development (USAID) agreed to work together to push this programme.  According to him, while discussions on the issue have been ongoing for several years, it was focused mainly on states in Central and South America and not on Caribbean states.

During the video conference, it was emphasised that for the system to be properly implemented there needed to be the political will by the government. For the system to be implemented there needs to be “a passage of a law to permit using non-real estate assets as collateral, establishment of a transparent and accessible public registry of rights in the assets that borrowers have used to guarantee loans” and “legal changes allowing a lender to seize the asset if the borrower does not repay the loan.”  The establishment of a properly functioning Credit Bureau was also identified as being essential.

Questioned about the possible drawbacks of such a system, the panelists pointed out that difficulties could arise if each of the necessary reforms are not implemented properly. Ambassador Shapiro noted that ideally the registry should be online and inexpensive to the people who use it.

He noted that in some territories, the governments saw the establishment of these registries as a way of gaining revenue and this had negative consequences.

Shahid-Saless, a Private Sector Development Specialist for the World Bank, said that her body provides Technical Assistance for countries that are interested in implementing the system of secured transaction.  She disclosed that the World Bank does training, diagnostic tests, makes recommendations and assists with the implementation of the project. She said too that the World Bank bears some of the cost for the project. Currently the World Bank is partnering with the Jamaican government in getting such a system established.

A modern secured transactions system accepts all types of assets (other than real estate) as guarantees for loans including inventory, accounts receivable (particularly invoices), and equipment. The rationale behind it is that a customer would be able to keep the asset and use it to generate income.  If the loan is not repaid, the lender is able to seize the asset. It is estimated that if fully implemented in all Latin American countries, a country’s economy may grow by 8 to 10 percent within a decade.

However, attendees at the forum from the local banking sector pointed out that the problem with such a measure in Guyana is that it is very difficult to keep track of moveable assets.  Banking officials explained that banks have moved to grant loans to customers with items other than real estate as guarantees.  It was, however, noted that extreme caution is demonstrated by the banks because of the “credit culture” in Guyana.  (Mark McGowan)

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