Collateral
Honduras has legal mechanisms capable of creating security interests in the various movable goods that provide the bulk of the world’s wealth today. However, these mechanisms have not been developed in practice and use. The laws also lack the refinements that drive modern secured transaction schemes. Specifically, the system lacks provisions that would (a) permit securitization arrangements, or loans secured by a set of debt or title instruments (such as mortgages, to cite a common example); (b) enable registration of a summary reference form that would fix the priority of a given creditor for a series of transactions secured against the movable assets of a given debtor; (c) allow purchase money security interests to preempt earlier security interests; or (d) permit buyers in the ordinary course of business to take collateral free of a creditor’s guaranty.
Moreover, the legal procedures for execution in the case of default, while relatively expeditious, are out of step with recent developments in this area. Even within the limited possibilities presented by Honduran laws, the risk-averse attitude of lending institutions has stunted the credit market in Honduras, although banks and other credit institutions reported enjoying liquidity of funds that otherwise might support a vigorous supply of credit for SMEs. Inexplicably, given the laws and the liquidity, interest rates run extremely high in Honduras, in the neighborhood of 35 percent to 40 percent, and higher.
Contributing significantly to the lack of an active market in secured credit, the Honduran courts need significant improvements, particularly related to sophisticated commercial operations. Thus, although the letter of Honduran laws and procedures might appear to support collateral guaranties for credit, in practice there is insufficient credit to support commercial growth. The lack of available credit represents a serious barrier to more dynamic development in Honduras.
Financing in Honduras relies today, on mortgage-based loans or loans guaranteed by individuals with immovable collateral to back up their guaranty. This is true of agricultural production loans and other loans in which collateral guaranties may be used as backup security, but not as the basis for the loan—a phenomenon not uncommon in the CAFTA region as a whole. With the exception of automobile loans to consumers, there is virtually no private credit market in Honduras that relies on collateral guaranties. The lenders who occupy the vacuum left by this practice tend to be public foundations and business associations that do not have lending philosophies that support and encourage development and growth. Rather, such last-resort lenders tend to provide holdover loans that permit borrowers to survive at their current levels of operation, but not to expand.
Honduras has begun meaningful reform in the laws controlling collateral guaranties, but there is some doubt about whether the reform will be permitted to take effect. Through the Property Law, Ley de Propiedad (LdP), the legislature passed a sweeping reform of the commercial and other registries, removing them from the administration of the Supreme Court and placing them in a new Institute of Registries. The legislature also provided for the use of new electronic land-title registration and a national cadastre. Although all agree that the existing registry suffers from corruption, delay, and inaccessibility, vested interests threatened by the reforms have mounted constitutional challenges to the new laws, which knowledgeable observers believe may well be sustained by the Honduran Supreme Court. Nonetheless, the current administration is drafting a reform law for collateral guaranties against movable property with the goal of having it in place within a year. Although the presidential team manifests a sense of urgency and commitment concerning these reforms, most Hondurans seem indifferent, and some are even resistant to reform. Interviews conducted for this assessment revealed a common perception that the current system does not require urgent reform.
Honduras has an inefficient credit market despite the presence of factors that could support a dynamic, efficient market. Much of the problem seems to stem from custom and practice and the attitudes that perpetuate them. At least at the executive level, and perhaps at the legislative level, Honduras seems prepared to push for reforms such as those embodied in model laws such as the Organization of American States (OAS) Model Law of Secured Transactions (2002), the Model Inter-American Rules for Electronic Documents and Signatures (2002), and other uniform laws from United Nations Commission on International Trade Law (UNCITRAL) and United Nations International Institute for the Unification of Private Law (UNIDROIT) that might harmonize the laws of the region and even the hemisphere thereby greatly simplifying credit and trade on a regional, hemispheric, and global basis. Whether the executive initiative can bring about reforms in both the letter of the law and its application remains to be seen, but such reforms should be encouraged in every possible way.
