BizCLIR

To a far higher degree than most countries, El Salvador has in place legal mechanisms capable of creating security interests in the variety of movable goods that provide the bulk of the world’s wealth today. Unfortunately, however, anachronistic procedural laws require unnecessary supervision of enforcement measures by an overburdened, inefficient, and unreliable court system. The relatively efficient substantive rights created by the Salvadoran legal system thus flounder against the dysfunction between substance and procedure, and the creditor’s risk inherent in a collateralized loan remains virtually as high as it would be if the substantive mechanisms did not exist and all loans had no guarantee. In the Salvadoran legal system, there is no way to turn movable collateral into an effective guarantee should the debtor fail to pay.

Financing in El Salvador relies today, as it did centuries ago, on mortgage-based loans or loans guaranteed by individuals with immovable collateral to back up their guarantee. Loan guarantees against movable collateral typically require high over-collateralization: the lender may loan as little as 20 percent or less of the collateral’s value. In El Salvador’s environment of high credit risk, the supply of credit offered by lenders remains relatively small. Marginal candidates for credit, including, by definition, virtually all SMEs, cannot gain access to credit from conventional lenders. However, it should be noted that, for borrowers who do gain access to credit, terms are excellent. According to interviews performed during the assessment, interest rates are reasonable in the extreme, well below 10 percent as of July 2004.

Ample and accessible special programs provide public and other alternative sources of credit that mitigate some of the reductions in credit supply imposed by the inefficient legal system and the high risks with which it saddles the market. Unfortunately, such sources of credit are seldom permanent or even long term, because they depend on international funding agencies whose programs often consist of seed money. Should such non-market sources of funds dry up, as they surely must, the shortfall in credit supply will be exposed, to the detriment of Salvadoran export capacity, business production, and general economic activity. The only measures that can forestall that result consist of reforms to the legal system that significantly reduce the risk to lenders by assuring them of efficient and effective guarantees against borrowers’ collateral.

El Salvador has the capacity to meaningfully participate in reform and harmonization in this area. Its commercial registry has undergone significant modernization—reflecting an attitude and environment for business that is palpably positive. Think tanks like Fundación Salvadoreña para el Desarrollo Económico y Social (Salvadoran Foundation for Economic and Social Development, FUSADES) have proved themselves effective, public-spirited sources of policy and conscience for the country. El Salvador manifests openness—even anxiety—to change and reform that many countries cannot approach.