The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s plan to boost small business access to financing by creating a movable Collateral Registry was yesterday hailed as “a tremendous step in the right direction” provided it is accompanied by the necessary training.

Edison Sumner, principal of Sumner Strategic Partners, told Tribune Business that while he “fully endorses” the regulator’s plan to transform the laws underpinning secured lending in The Bahamas it needs to educate micro, small and medium-sized businesses (MSMEs) on how they can properly monetise intangible assets such as intellectual property so that they can be employed for loan collateral.

A former Chamber of Commerce chief executive, who sits on the Government-sponsored venture capital fund’s Board, he added that even entities such as the latter - established to give small business better access to capital - require some level of security for any debt financing provided as do guarantors of these advances.

“I think it’s a very good step in advancing the ability of SMEs to access capital, especially for those that might not have had the security that financial institutions are looking for to collateralise loans,” Mr Sumner told this newspaper. “The fact the Central Bank is moving into this new system will be tremendous for SMEs.

“The direction, the Central Bank is moving in, I fully endorse it. It’s a tremendous advance in funding and embracing ways to capitalise on the SME space.” He added the ambition to create an Internet-based registry of movable collateral, such as vehicles and equipment owned by SMEs, which could be pledged as loan security, could also link well with The Bahamas’ ambitions to become a digital assets hub.

In unveiling its plans, 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.

However, Mr Sumner said there “has to be some level of training” provided to SMEs and entrepreneurs over how they could value, monetise and employ such “intangible assets” as a means to secure credit for their start-ups and companies.

“There has to be some very significant training for the SME community, small businesses and entrepreneurs on the value of intellectual property so that they become more comfortable in their approach to it and setting up businesses to access funding from various institutions,” he added.

“Apart from the training of SMEs, they will have to bring along in this process the capital markets, the financial firms, those involved in investing in entrepreneurs in this country, so 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 subsequently developed by others for commercial use, is an established concept in many countries, Mr Sumner recalled his experience with the Bahamas Entrepreneurial Venture Fund.

“We’ve had brilliant ideas presented for funding, but some of the principals lack the fundamentals that investors are looking for, which is skin in the game,” he added. “Maybe they can now use that business plan, the concept in the plan, to secure funding for their business.”

Mark Turnquest, of Mark A. Turnquest Consulting, a small business advisor, said that while any effort to improve the sector’s access to financing is welcome the Central Bank’s movable Collateral Registry will not be a one-shot solution by itself.

Recalling his time on the Bahamas Agricultural and Industrial Corporation’s (BAIC) Board, he said it had never solved the obstacles its farming tenants faced in obtaining credit due to the fact they did not own the land worked.

The Central Bank, 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 MSMEs to pledge mobile assets - such as vehicles and equipment - to lenders as security for credit they extend.

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.