Collateral Registry hailed as a ‘tremendous move’

By NEIL HARTNELL

Editor-in-chief of the Tribune

[email protected]

The Central Bank’s plan to boost small businesses’ access to finance by creating a mobile collateral registry was hailed yesterday as “a tremendous step in the right direction” provided it is accompanied by the necessary training.

Edison Sumner, director of Sumner Strategic Partners, told Tribune Business that while he “fully endorses” the regulator’s plan to transform the laws governing secured lending in the Bahamas, he must educate micro, small and medium-sized enterprises (MSMEs ) on how they can properly monetize intangible assets such as intellectual property so that they can be used as loan collateral.

A former chief executive of the Chamber of Commerce, which sits on the board of the government-sponsored venture capital fund, he added that even entities like the latter – set up to give small businesses better access to capital – require a certain level of security for any debt financing provided. as are the guarantors of these advances.

“I think this is a very good step to improve the ability of SMEs to access capital, especially for those who may not have had the security that financial institutions seek to guarantee loans,” said Mr. Sumner to this newspaper. “Having the Central Bank enter this new system will be great for SMEs.

“The direction in which the Central Bank is heading, I fully endorse. It is a huge step forward in financing and adopting ways to capitalize on the SME space.” He added that the ambition of Creating an internet-based registry of moveable collateral, such as vehicles and equipment owned by SMEs, that could be pledged as loan collateral, could also fit well with the Bahamas’ ambitions to become a hub for digital assets.

In unveiling its plans, the Central Bank said that the Secured Property in Movable Property Bill 2022 will also provide the legal and regulatory framework for the use of so-called “intangible assets” – accounts receivable (factoring) and intellectual property rights – as loan collateral, securing the rights of lenders and borrowers.

However, Mr Sumner said there “needs to be some level of training” provided to SMEs and entrepreneurs on how they could value, monetize and use these “intangibles” as a means of obtaining credit for their start-ups and businesses.

“There needs to be very important training for the SME, small business and entrepreneur community on the value of IP so that they are more comfortable in approaching and building businesses to access funding various institutions,” he added.

“In addition to the training of SMEs, they will have to involve in this process the capital markets, the financial companies, those who invest in the entrepreneurs of this country, so that they can appreciate the value of intellectual property and movable assets as a means to secure their loans or investments in these companies.

Noting that the practice of innovators selling the rights to their intellectual property, which is then developed by others for commercial gain, is an established concept in many countries, Sumner recalled his experience with the Bahamas Entrepreneurial Venture Fund.

“We’ve had some brilliant ideas presented for funding, but some of the leading ones don’t have the fundamentals that investors are looking for, which is skin in the game,” he added. “Maybe now they can use this business plan, the concept of the plan, to secure funding for their business.”

Mark Turnquest, of Mark A. Turnquest Consulting, a small business adviser, said that while any effort to improve the sector’s access to finance is welcome, the Central Bank’s Mobile Collateral Registry will not be a unique solution in itself.

Recalling his time on the board of directors of the Bahamas Agricultural and Industrial Corporation (BAIC), he said he never resolved the obstacles his agricultural tenants faced in obtaining credit due to the fact that they did not did not own the tilled land.

The Central Bank, launching a public consultation on long-awaited efforts to transform secured lending in the Bahamas, said the proposed registry, combined with legal reforms, will allow MSMEs to pledge mobile assets – such as vehicles and equipment – to lenders as collateral for credit. they extend.

Highlighting that small businesses already face significant hurdles in obtaining credit from traditional lenders, with a 2010 World Bank study finding that collateral equivalent to 231% of the loan value was generally required, the Central Bank said the post-COVID fallout was likely to make banks even more risk-averse when it comes to financing SMEs with minimal track records.

And the regulator, in its consultation paper, said advisers it hired to study the Bahamas’ existing secured lending framework found multiple gaps, weaknesses and shortcomings that were inconsistent with international best practice. In addition to the absence of a legal basis for the factoring of trade receivables, electronic transactions involving the lending of securities cannot be perfected or recorded because the Commercial Register only accepts paper documents.

“In the Bahamas, credit to the private sector has declined over 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% of the loan value, which was higher than that of its Latin American and Caribbean and low-income counterparts. high (non-OECD),” the central bank said, as it moved to justify the reforms.

“Furthermore, there is a serious mismatch between the assets that credit institutions will accept as collateral and the assets held by SMEs. In the Bahamas, the preferred form of collateral is real property (property and land), and movable property accepted by most commercial banks and credit unions is extremely limited, but SMEs generally do not own real property.

“In developing countries, most of the assets held by SMEs are movable assets, which include vehicles, machinery, equipment and accounts receivable, with an average ownership of just 22% in land. This means that SMEs are often denied credit or cannot afford to borrow due to high loan rates. Often, the legal framework does not facilitate the use of movable assets as collateral.

Warning that the inability of SMEs in the Bahamas, which are believed to represent 90% or more of all businesses in that country, to access credit is likely to only get worse, the Central Bank said: “The economic crisis caused by the pandemic of COVID-19 is likely to increase market risk, liquidity risk and credit risk, leading to lower lending, especially to SMEs, a sector likely to be hit harder by the pandemic.

He added, however, that the introduction of secured loan schemes as currently offered for the Bahamas had increased access to loans by 7%. Countries that had made the switch also saw a 3% reduction in interest rates paid on loans and a six-month increase in the tenor of bank loans.