Recent research by the World Bank confirms that small businesses are the largest provider of jobs in developing countries but inadequate access to finance is one of the biggest obstacles to small business growth. In Canada and the United States, small businesses use many different sorts of collateral – equipment, inventories, accounts receivable – as security for bank loans but, in most developing countries, financial institutions will not lend to any business owner who does not own real estate.
Development agencies, including CIDA and USAID, have put private sector development at the top of their priority list only to discover the difficulties of translating ideals into effective action. Creating an “enabling environment for business” is a popular promise. How do we achieve this?
Micro-credit has been the flavor of the month for several years because it allows small entrepreneurs to achieve some level of self-sufficiency but, since micro-loans are unsecured, the interest rates can run well above 40 percent. Microenterprises have a hard time growing any bigger with such high debt-service costs and those who don’t have access to micro-loans are left at the mercy of loan sharks.
International development banks have focused on various strategies for financial inclusion for the poor including the establishment of credit bureaus and non-branch banking alternatives. It turns out that one of the most effective tools of financial inclusion
This change, known as secured transaction reform, works in tandem in with the establishment of online collateral registry systems and modifications to bankruptcy laws to provide an orderly repayment schedule in the event of default.
Canadians may be surprised to know that the model for the secured transactions laws being implemented in many developing countries is based on our provincial Personal Property Security Acts. Both the United States and Canada have an opportunity to help move these reforms along in Latin America and the Caribbean where our countries have a strong development, business, and banking presence.
Canadian banks and NGOs have taken a particular interest in helping to build consensus for secured transaction reform in the Caribbean where Scotiabank, RBC and CIBC have major banking footprints. At a conference on financial inclusion last year, then-Minister of State of Foreign Affairs (Americas) Peter Kent noted, “Secured transactions reform and financial inclusion are important ways we can use market-based solutions to address development challenges.” However, a strong, coordinating role from Canada’s development and foreign policy community is what is missing in order to translate good intention into reality. With the fortunes of the large emerging markets – China, Brazil, India – on the ascendency, the small economies must keep pace. Change is hard but by opting to stand still in a globalized world we are, in fact, falling behind.