BizCLIR

Secured lending is an essential element of an effective and vibrant market economy. It allows a businesses or persons to offer their movable assets to a lender as security. The most basic example of this is a pawn shop transaction, where the lender takes possession of the property as well as the right to sell the item in the event of non-payment.

A modern secured lending regime goes beyond the pawn shop transaction, by allowing a borrower to maintain possession of the asset offered as security. This allows it be used more productively, increasing the borrower’s opportunity to generate the funds to repay the loan. The downside is that the lender’s risk increases substantially when the pledged asset is no longer in his or her control.

To give lenders the confidence to enter into these types of transactions, a country’s secured lending environment needs to include several elements. There must, of course, be the proper legal framework, allowing the taking of secured interests and their registration with a state-sanctioned authority. An effective registration system in turn requires a functioning registry. Finally, should the debtor default, resulting in a need to exercise the creditor’s rights, there must be effective enforcement.

Fragments of each element exist in the Philippines. It has a legal framework consisting of a chattel mortgage law (a law for mortgaging movable property) and a series of quasi-security arrangements based on various provisions of its civil code and other legislation. The registry handles only chattel mortgages and is entirely paper-based. The system for enforcement, which allows for extra-judicial foreclosure of assets, is prone to delay and inconsistency. The result is a legal regime that provides sufficient comfort primarily to lenders willing to take as collateral automobiles and other moving vehicles (aircraft, ships), the ownership rights of which must be filed in parallel registration systems (such as the automobile registry at the Land Transportation Office). On far fewer occasions are lenders willing to take equipment, inventories, or future crops as security, all of which lack the benefit of a parallel registry system.

At the same time, small- and medium-sized enterprises (SMEs) need operating capital. With a substantial portion of their assets useless for raising funds, they instead rely on: (a) government-provided or mandated credit; (b) credit offered at onerous rates; and/or (c) a legal regime that subjects business owners to criminal penalties for non-payment of post-dated checks.

Efforts to reform the system for secured transactions should focus on amendments to the legal framework and the modernization and expansion of the current chattel mortgage registry. Enforcement of rights in the event of default could also be improved, especially as it relates to property subject to rapid spoilage or instances where the debtor enters insolvency proceedings.