BizCLIR

An effective system of secured lending is the product of: (a) an up-to-date substantive law; (b) a fully transparent, accurate, and easily accessible registry of debtors and of individually valuable collateral that can be identified by serial number or other means of individual identification; (c) an enforcement of security interests by means of extrajudicial self-help and by the speediest of judicial processes of execution of the various security interests; and (d) a sound central banking or regulatory policy that carefully monitors the lending risks and rewards prudent lenders with access to liquidity and better rates of interest. In mature legal systems (i.e., systems that rely on ordered and hierarchical sources of law and that articulate the functions of their key legal institutions), elements (b), (c), and (d) above are the result of proper implementation of element (a).

Guatemala’s current system for secured transactions is inadequate to meet national and regional commercial credit needs for economic growth—particularly those of micro- and small businesses wishing to expand and/or improve their commercial activities with a view to taking advantage of the benefits of CAFTA as well as preparing for post-CAFTA challenges. Financing continues to rely predominantly on mortgage-based loans and personal guarantees. Foreign investors tend to rely on sources of financing in their own or in third countries, usually at more affordable rates of interest. In contrast, micro-, small, and medium-sized Guatemalan businesses find themselves having to pay interest rates in excess of 30, 40, and sometimes even 50 percent per year in their borrowings from private lenders (nongovernmental organizations, associations, and cooperative companies) that offer simpler and non-real-estate-based solutions, as opposed to those usually required by banks. The same dilemma of high interest rates faces foreign investors who, based on the volume of their investment and the lack of real estate or personal guarantees, wish to obtain initial or additional lines of credit to conduct or expand their business in Guatemala.

The scarcity of commercial credit and its high cost lead Guatemalan micro-, small, and medium-sized businesses to finance themselves out of limited savings and thus hinder the economic development that reasonable rates of interest would make possible. Thus, unless Guatemalan small and medium-sized businesses could borrow at reasonable rates, such as are available to (among others) U.S. investors and exporters, Guatemala will experience a loss of micro-, small, and medium-sized businesses and will become a less attractive market to prospective foreign investors and commercial and other businesses. This risk has already been identified by the Ministry of Economy (Vice Ministry for Micro, Small and Medium-Sized Businesses), as part of what has been designated as the Micro, Small and Medium-Sized Business Crusade (Cruzada MIPyME). Indeed, the primary goal identified as part of this Crusade is the implementation of a program to obtain financing at competitive rates.

If Guatemala were to modernize its secured lending law and unify it with that of its Central American neighbors, it would be able to act as an effective engine for its own and for regional economic growth. With the help of legal modernization and harmonization with its regional counterparts, the Guatemalan financial institutions would qualify for assistance and cooperation by some of the largest secured lending institutions in the United States and Europe.