The Inter-American Development Bank is seeking to define a regional strategy to
improve access to credit for Small and Medium Enterprises (SMEs) in the Latin America
region. The core of this strategy is a reform of secure lending on the basis of movable
collaterals that will allow SMEs to use a larger portion of their assets to obtain credit. The
expectations are that once implementation is complete, the supply of bank credit to SMEs
will expand and the terms will also improve in costs, amounts and duration. This work
examines the reforms in place or in various stages of implementation in Jamaica, Mexico
and Peru. The study of each case can provide inputs to, extract lessons from the practical
experience of these three countries and formulate some possible strategies to complete
the reforms.
There is ample evidence that countries with better creditor rights and debtor information
have more developed private credit markets. The stronger the creditor rights and
information-sharing institutions, the more likely banks will be open to extend credit.
Jamaica, Mexico and Peru are in different stages of reform of their secure lending system.
The potential gains to each are enormous in terms of more capital available for
investment to the SMEs. There is lending on the basis of movable collateral in all three
countries but the systems have different strengths and degrees of development.
Peru has taken the earlier and bolder actions and has a comprehensive legal framework in
place. The results are not as expected namely because the registry still does not operate
as a digital archive. Instead debtors and creditors must make several trips to the registry
to comply with verification of underlying documents. In Mexico the reforms have been
gradual but have progressed slowly forward with improvements in the laws for secure
lending that allow for non-possessory pledges since 2000 and in 2010 with the
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establishment of a digital unified registry for movable collaterals. The challenge will be
to ensure that even informal SMEs, who comprise a large share of SMEs in the country,
use a new legal infrastructure that requires providing information on line. Jamaica just
approved an Act to permit the creation of credit bureaus, a badly needed service in a
market with no information about borrowers’ credit records but the regulations for the
law have not been drafted.
The effectiveness of each strategy depends on the condition of the banking system in
place, its health and competitiveness, especially in the market for SME banking which is
always rife for political wrangling. The research carried out in this work highlights some
of the problems of each of these credit markets and points to possible steps/strategies to
accelerate adoption and implementation. The reforms are progressing relatively slowly
although in all cases, policy makers and an increasing number of stakeholders – business
associations, bar associations, academics and so on are convinced of the benefits of
stronger creditor rights.
The choice reform requires careful understanding of the politics on the ground. What
may appear to be the path of least resistance could prove quite intractable. For example,
even though the introduction of credit bureaus is a less contentious than changes to the
secure laws, it may require divestiture of ownership by owners and this may not be easily
accomplished. The case of Mexico’s credit bureau industry illustrates this point. Reforms
to the laws that govern collateral lending are a continuing process in all three countries
where lending guaranteed by movable collateral is already in motion. Only Peru has a
complete system of secure lending with a dedicated law and a geographically unified
collateral registry. Mexico has advanced a number of laws related to secure lending after
2000 and is working towards the establishment of a centralized and electronic based
property registry. Jamaica’s legal system allows for lending on the basis of movable
assets but it does not have a separate registry for movable collaterals and instead parties
to an agreement must use the central registry. The next generation of reforms should
include a review of these changes and identify areas that may need alterations to ensure
protection of creditor rights