Volume 42 | Number 3 Summer 2007
Page 2 of 6
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I. The Economic Effects of Commercial Secured Lending
Commercial loans (also known as secured loans or as secured transactions) are loans particularly suited to satisfy the credit needs of small- and medium-sized enterprises. While their key features will be described in detail in the following sections, their economic significance must be appreciated from the outset. Because secured lending reduces commercial risks, it increases the borrowers’ access to credit and lowers the rates of interest. The role that the risk of non-payment plays as a component of the rates of interest is apparent in a 1999-2000 study by the Central Bank of Brazil:1 One-third of the approximately forty percent per annum interest rate paid at that time by Brazilian commercial borrowers was attributable to the legal uncertainties of collection.2
On the other hand, World Bank studies demonstrate that in a competitive lending environment, the risk reduction that results from adopting an effective secured lending system can be passed on as savings to the borrower in the form of lower interest rates. For example, in Albania, adoption of a modern secured lending system in 2001 reduced risk premiums by half and lowered interest rates by five percentage points, while in Romania, the rate of interest dropped by twenty percent since the new system was introduced in 2000.3 Similarly, Mexico’s 2003 amendments to its secured transactions law, which reduced some of the risks of collection, helped its economy grow “at a 4% rate during 2004 and . . . all credit sectors are growing at an annual rate exceeding 20%.”4 Speaking to a bankers’ meeting in 2005, Alfonso García Tames, then Mexico’s Deputy Secretary of the Treasury, noted that:
Commercial credit showed a favorable rate of growth during the last three trimesters of 2004. In fact, between 2003 and 2004, the increase in this portfolio was 16.8% in real terms. In turn, the credit to consumers also showed great dynamism, with annual rates of growth of 38.6% in the last four years. In the last trimester of 2004, the percentage of real growth was 41 percent in relation to the growth during the same trimester in the preceding year.5
These findings were consistent with the studies by another World Bank economist who estimated that the absence of commercial credit amounts to a loss of three to nine percent of a Latin American country’s GDP.6
The effects of a sound secured lending law are felt also in other economic sectors beyond those traditionally associated with small- and medium-sized commerce, such as in the securitization of the revenues derived from construction—and especially housing projects. This type of financing is made possible by the sale in secondary markets of low- and middle-income housing mortgages and deeds of trust. Hence, it contributes hundreds of billions of dollars of construction financing annually to the economies of the United States and other developed nations, especially in Europe. Directly or indirectly, securitization relies on the personal property security afforded by the possession of documents that incorporate creditors’ (security holders’) rights in the underlying properties.