By NEIL HARTNELL
Tribune Business Editor
The Central Bank has unveiled plans for an Internet-based collateral registry that will ease Bahamian small business access to funding in a market where the security demanded is often more than three times’ the loan amount.
The regulator, kick-starting public consultation on long-awaited efforts to transform secured lending in The Bahamas, said the proposed registry combined with legal reforms will enable entrepreneurs, start-ups and micro, small and medium-sized businesses to pledge mobile assets - such as vehicles and equipment - to lenders as security for credit they extend.
In addition, the Central Bank said the Movable Property Security Interest Bill 2022 will also provide the legal and regulatory framework for using so-called “intangible assets” - accounts receivables (factoring) and intellectual property rights - as loan collateral, securing the rights of both lenders and borrowers.
Pointing out that small businesses already face significant obstacles to obtaining credit from traditional lenders, with a World Bank study in 2010 having found collateral equivalent to 231 percent of the loan value was typically demanded, the Central Bank said the post-COVID fall-out was likely to make risk averse banks even more skittish when it came to financing SMEs with minimal track record.
And the regulator, in its consultation paper, said advisors it had hired to study The Bahamas’ existing secured lending framework had found multiple gaps, weaknesses and deficiencies that were inconsistent with international best practice. Besides the absence of any legal basis for accounts receivables factoring, electronic transactions involving lending security cannot be perfected or recorded because the Companies Registry accepts only paper-based documents.
“In The Bahamas, private sector credit has been on the decline during the past decade, and collateral requirements remain high, hampering access to credit and collateral. According to the 2010 World Bank Enterprise Survey, collateral requirements were estimated at 231 percent of the loan value, which was higher compared to its Latin American and Caribbean and high-income (non-OECD) peers,” the Central Bank said, as it moved to justify the reforms.
“In addition, there is a serious mismatch between the assets that lending institutions will accept as collateral and the assets held by SMEs. In The Bahamas, the preferred form of collateral is immovable property (real estate and land), and the movable property accepted by most commercial banks and credit unions is extremely limited, but SMEs typically do not own immovables.
“In developing countries, most assets held by SMEs are movable property, which include vehicles, machinery, equipment and accounts receivables, with an average holding of a mere 22 percent in land. This means that SMEs are often either denied credit outright or cannot afford to borrow due to the high lending rates. Often, the legal framework fails to facilitate the use of movable property as collateral.”
Warning that the inability of Bahamian SMEs, which are thought to account for 90 percent or more of all companies in this nation, to access credit will likely only worsen, the Central Bank said: “The economic crisis caused by the COVID-19 pandemic is likely to increase market risk, liquidity risk and credit risk, resulting in a lending decrease, particularly to SMEs, a sector likely to be more harshly hit by the pandemic.”
It added, though, that the introduction of secured lending systems such as it is now proposing for The Bahamas had been shown to increase access to loans by 7 percent. Countries who had made the change also saw a reduction of 3 percent on interest rates paid on loans, and an increase in the maturity of bank loans by six months.
Turning to the analysis performed on its behalf by a consultant, the Central Bank said of the findings: “The existing legal framework is incomplete and fails to address all the principles highlighted by best practices, including important rules for the operation of modern lending products, such as receivables financing and acquisition finance.
“Currently, the rules required to structure effective receivables’ financing do not exist under The Bahamas’ legal framework, limiting the capacity of SMEs to access immediate finance using their accounts receivable as collateral. As such, creditors rely on high collateral requirements, mainly immovable property, and lack the incentive to create new lending products secured with movable property.”
Pointing out that The Bahamas’ existing legal regime was fragmented, with multiple laws dealing with secured lending, the Central Bank said the review also showed much legislation was “old and fails to address the needs of modern markets”. The reliance on common law, as opposed to statute, also increased the security risk.
“The existing laws are limited in scope and give advantages to certain creditors over others,” it added. “For example, even though companies may enter transactions electronically, secured transactions are expressly excluded because they are usually recorded in the Deeds and Documents section of the Registrar General’s Department which does not have the capability to process electronic data.
“A review of the laws that govern electronic transactions in The Bahamas indicates that the existing framework is generally adequate to enable the implementation of an electronic Collateral Registry. There are, however, certain shortcomings derived from the need to register secured transactions in the Registry, such as the impediment to execute secured transactions electronically.”
Going through the Bahamian judicial system to enforce liens and loan security is viewed as expensive and time-consuming, and the Central Bank said: “The system for registering documents at the Registry is obsolete, expensive and does not provide the transparency required to eliminate secret liens.
“Similarly, the rules governing priorities fail to address business transactions involving movable property. The current framework recognises the general rule of ‘first in time to register’ but does not address important exceptions that serve to promote credit to sectors and the funding of specific types of assets - acquisition finance, buyers in the ordinary course of business, agricultural financing etc.”
Unveiling the Bill’s provisions, the Central Bank said the central reform will involve “the establishment of a modern Collateral Registry system and the appointment of a registrar in charge of running the Collateral Registry. The Collateral Registry system would operate using a web-based electronic database and most functions would be performed automatically.
“Therefore the registrar would be tasked with maintaining and ensuring the adequate operations of the Collateral Registry with minimum intervention. Secured creditors, and their agents, will have access through the registry’s website 24/7 to search the database and register notices of security interests in real-time. This will allow persons conducting searches to find the information on security interests in real-time, eliminating invisibility periods and increasing transparency.”