Volume 42 | Number 3 Summer 2007
V. Conclusions and a Corrective Strategy
The proposition that the financial plight of the poor in developing nations is hopeless deserves reconsideration in light of the repeated findings on the impact of commercial and consumer credit at reasonable rates of interest upon economic growth and reduction of poverty. Similarly, the conclusion that the massive distribution of legal titles to real or personal property is a necessary and sufficient condition to economic development also deserves reconsideration. At best, it may be a necessary but not a sufficient condition for certain—mostly real estate secured—loans. The transition from a micro to a commercial loan requires from either real or personal property collateral more than simple ownership or title: it requires self-liquidation and everything associated with this essential feature of the commercial loan.
However, a corrective strategy for making commercial and consumer credit available at reasonable rates of interest in developing nations by adopting an open system of secured lending is still a work in progress. Much depends upon special features of the business and legal cultures of the country in question and upon the answers to critical legal and socioeconomic questions, such as: how valuable are its goods and services in local and international markets; how large is its consumer and borrowers’ class; how skilled and educated are its craftsmen acting as small- and medium-sized businesses; how picaresque or tricky are the business practices associated with credit sales or with purchase money loans; how picaresque or tricky, or honest and reliable are its accounting practices (can lenders truly rely on what appears on financial statements?); how reliable are its collateral value appraisals or commercial insurance; how corrupt is its administration of justice; are there knowledgeable and honest bankruptcy trustees; are creditors’ committees truly representative and trustworthy; how developed and reliable are its means of communication; and how dependable and costly are its transportation, warehousing and communications systems? These, and other variables, can become responsible for the viability of an OAS Model Law-inspired statute and the rapidity of its success.
The experience with commercial lending in Latin America suggests some common normative problems whose solution deserves consideration as part of a successful strategy. These are:
1. A secured lending law ought not be treated as an isolated legal enactment. Its success depends upon the enactment of equally effective and market-sensitive laws of bankruptcy, insolvency, electronic commerce (including an electronic registry of security interests in personal and real property) and more functional (and less formalistic) laws of contracts, negotiable instruments, and documents of title. Otherwise, whatever legal protection of third party creditors is obtained through the law of secured transactions will be lost by a “loose” or otherwise non-existing bankruptcy or e-commerce law. Similarly, whatever transactional speed and lower cost of operation is achieved by the law of secured transactions will be lost by imposition of costly formalities by the law of contracts, negotiable instruments, documents of title, or by the laws that govern the notarial or governmental formalities of these and other transactions.
2. As was done in the case of Guatemala and Honduras78—and will hopefully be done in Costa Rica and Chile—a careful evaluation of the most valuable and liquid collateral in the marketplace should precede the drafting of the provisions on perfection, priority and enforcement of security interest. For example, assuming the agricultural nature of such collateral in Guatemala and Honduras, perfection, priority, and enforcement rules should take into account the ad hoc type of documents or electronic records, ones that could convey rights to the collateral in question to bankers and purchasers in major spot and futures markets for the goods in question.79
3. Best practice guides should be developed and their use carefully monitored. Training and regular monitoring of performance should apply not only to secured lenders and borrowers, but also to the financial statement and reporting practices of accountants, appraisers, and business inspectors—whether they are acting as the parties’ staff or independent contractors. The importance of reliable financial statements and certifications of value—particularly with regard to the required amount of collateral—cannot be overstated, especially in a picaresque business culture.
4. Lawyers, judges, registrars, mediators, and arbitrators should be trained in the market and third party protection-sensitive interpretation and administration of the secured transactions, bankruptcy, e-commerce, contracts, and registry laws.
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Footnotes
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