Please Credit Me
Micro, small and medium-sized enterprises (“MSMEs”) have been recognized as one of the likely key drivers of economic development in Jamaica. This is due to the central role that MSMEs play in job creation. However, MSMEs have traditionally encountered significant difficulties with accessing financing due to their inability to provided conventional forms of securities, such as real estate, stocks and bonds to name a few.
The International Monetary Fund’s Country Report No. 13/126 indicates that Jamaica’s current growth strategy envisages an improvement in the business climate through an increase in the accessibility of credit to MSMEs. An important step in this direction occurred with the enactment of the Credit Reporting Act 2010 (the CRA).
The CRA provides for the licensing and operation of credit bureaus in Jamaica and for the sharing of credit information. The exchange of credit information on an individual or firm usually goes a long way in the assessment of credit worthiness with the likely result of encouraging financial institution to lend at more accessible rates. The CRA is important because lenders have historically had difficulty determining the credit worthiness of MSMEs.
In addition to the CRA, the Government of Jamaica is now taking steps to modernize the legislative framework for secured transactions through its enactment of the Secured Interest in Personal Property Act (“SIPP”). Secured transactions are an essential part of commerce. For the purposes of the SIPP, a secured transaction is a loan or a credit transaction in which the lender acquires a security interest in certain property other than real property. A security interest provides the lender with the assurance that it will be able to recover the value of the loan by taking possession of the encumbered property in the event that the borrower defaults or becomes bankrupt.
The SIPP will provide the framework within which MSMEs may, with greater ease, use their moveable property (such as equipment, trade marks, inventory or accounts receivables) as collateral for loans. This is important because moveable property whether tangible or intangible, often account for the majority of the assets of MSMEs.
An effective and modern secured transactions regime requires an efficient registration system. The SIPP proposes to facilitate a simple registration process for the recognition of the security interest created in moveable assets. The SIPP provides for the establishment of a single electronic Register for Security Interests. International best practices indicate that electronic systems are preferred in comparison to paper based systems. This is primarily because registrants and persons conducting searches have immediate access to information.
Upon the creation of the security interest, the parties to the transaction will be required to file a registration notice in the Register for Security Interest, which will be available for public inspection. The registration notice should provide a description of the debtor, the creditor and the secured property. The SIPP does not impose an additional requirement to file a copy of the agreement that creates the security interest or any other document. This will certainly prove to be beneficial to MSMEs as it will help to reduce the administrative costs associated with borrowing. This is because a notice- based registry incurs lower administrative and archival costs than a system that mandates the registration of voluminous documentation.
In addition to the foregoing, the SIPP sets out the rules which will govern the priority in which the security interests created in an asset will be enforced. The concept of priority is at the core of every successful secured transactions regime. It is particularly important because under the SIPP, MSMEs will be able to fully maximize the value of an asset by obtaining secured credit from more than one creditor using the same asset as security. The priority provisions, therefore, will aid in the resolution of competing claims in the asset.
Generally, lending to small businesses is considered riskier and more costly than lending to larger firms. The promulgation of the SIPP is premised on the view that the provision of security will have the effect of reducing the risk of non-payment of loans. This will, in turn, result in a reduction of the costs involved and an increase in the credit available to MSMEs. It is further believed that credit at a lower risk will have the spin-off effect of promoting the economic development of Jamaica.