KINGSTON, Jamaica — The Ministry of Industry, Investments and Commerce says the government is a step closer to developing Jamaica’s secondary market for movable assets, to improve access to financing for micro, small and medium enterprises (MSMEs).

The government’s efforts will allow small businesses to access funding through asset-based lending (ABL) by using movable assets as collateral for loans.

It follows the publication of findings of an assessment of secondary markets for movable assets in Jamaica by the World Bank’s International Finance Corporation (IFC).

According to the ministry, the assessment — the first of its kind in the Caribbean to be commissioned by the IFC — is focused mainly on the operations of small manufacturers and agro-processors. It was conducted in 2020.

The ministry noted that access to finance is one of the major issues confronting MSMEs, which is further exacerbated by the economic shocks caused by the current COVID-19 pandemic. I

t said movable asset based lending (MABL), the modality of utilising moveable assets as a collateral mechanism for MSME financing, should now be front and centre for consideration by capital providers.

Movable assets, the ministry explained would include non-traditional but valuable, portable and transferable assets such as agricultural produce, livestock, securities, machinery and equipment, accounts receivables and intellectual property.

The ministry explained that secondary market development — typically used for the disposal of the assets — is therefore an important and necessary component of a fully functioning secured transactions regime for movable assets. This, it said as a fully functional secondary market environment can help to create a comprehensive credit infrastructure where secured transactions provide an effective means of managing credit risk which means creditors can better manage their risk in lending to MSMEs with solid movable assets.

According to the World Bank report, lending based on the use of movable assets is much more common in developed markets, such as the United States, where more than 63 per cent of loans to MSMEs are collateralised using movable assets. However, the ministry said this is not the case in developing and emerging economies, despite that fact that movable assets represent as much as 78 per cent of the capital stock of MSMEs in these countries relative to immovable assets (land and buildings) which amounts to 22 per cent.

The report also highlighted the fact that the majority of MSMEs in developing countries are unable to use traditional assets to collateralise loans, due to the significant challenge in creating wealth on a sustainable basis. Noting that economies with best practice secured transactions regimes include Mexico, Colombia, Peru, Vietnam, and China, the ministry said the increased use of MABL has resulted in increased financing to MSMEs, reduced credit costs and increased productivity levels.

“This is good news for Jamaica’s MSME sector, as businesses constantly face challenges in accessing loans from financial institutions as they are considered risky investments. With MABL however, a business operator may access funding if he is able to present an asset that the creditor can readily value and dispose on the secondary market. On the other hand, if a market for such transaction is not readily available the creditor may be reluctant to accept the asset as collateral,” the ministry explained.

It noted that in recognition of this, the Government of Jamaica has moved to implement legislation and regulations for modernising the secured transaction regime by passing the Security Interests in Personal Property Act (SIPPA) and establishing the National Security Interests in Personal Property Registry (NSIPPR) in 2013, thereby paving the way for the development of MABL as a viable modality for MSME financing.

“The registry allows for the listing of collateral assets used for financing and so creates a priority of interest among creditors. In other words, it allows a potential creditor to determine if another creditor has priority interest in an asset in order to avoid multiple claims on the asset and tracks transactions between creditors and debtors,” the ministry said.

The ministry noted that in its assessment of Jamaica’s secondary market for MABL, the World Bank report found that as of 2018, the number of registrations within the registry had increased by over 25,000 collateralised assets and that the top three types of collateral used for financing were motor vehicles, furniture, and securities. It said motor vehicles represented 79 per cent of assets listed on the registry as it can be valued and disposed of easily relative to other assets used in the registry.

Nevertheless, the report pointed out that commercial banks were conservative in their lending choices, and that there is a need to improve accounting processes, project evaluation and reporting among MSMEs. The report also noted that consumers represented the majority of borrowers (over 63 per cent) and over 83 per cent of the collateral listed on the registry were used to secure individual loans. It went on to state that commercial customers represented just 5.7 per cent of registry, with MSMEs representing 8.8 per cent of the borrowers.

The report also highlighted that there is considerable scope for increasing the types of movable assets used as collateral to finance credit transactions, as well as, increasing the types of clients that utilise this form of borrowing.

The ministry said the main takeaways from the study included the need for investments in the establishment of robust secondary markets and implementing efficient and comprehensive technological platforms or portals that can facilitate trade of multiple types of movable assets and bring together a critical mass of buyers and sellers from Jamaica and the wider Caribbean to facilitate a greater level of trade in movable assets.

It said the platform should also provide key value-added features that support decisions and bridge institutional weaknesses in the Jamaican market. Such weaknesses revolve around the issues of asset valuation, screening of buyers and sellers, facilitating online payments and transparency in the pricing of repossessed assets for resale, the ministry said.

The ministry said the report is a call to action for the private sector to consider investing in a robust secondary market system with efficient and effective digital platforms and infrastructure that allows for quick disposal of repossessed assets, thereby facilitating the growth and development of the MSME sector.