Facilitating Growth: Addressing the Challenges of Small Business Finance in the Pacific through Collateral Reforms
By Jeremy Cleaver, PSDI Financing Growth Specialist, Katherine Passmore, PSDI Financing Growth Analyst, and Simon Thompson, PSDI Finance Consultant.
There is a paradox in the Pacific. It is widely accepted that micro, small, and medium businesses (MSMEs) are at the heart of the Pacific economy, and essential for regional growth. At the same time, many lenders consider MSMEs too risky for loans. They are perceived as lacking collateral, having poor financial records, and being overly labour-intensive to monitor. Without access to finance, these businesses cannot grow, which hinders broader economic growth and job creation.
MSMEs in the Pacific operate in a variety of sectors, from farmers to shopkeepers, transport operators, manufacturers, and service providers. They represent by far the largest number of businesses across the region, and support the most livelihoods. The challenge is identifying how best to assist their growth and success.
The Pacific Private Sector Development Initiative (PSDI)—a technical assistance program undertaken in partnership with the Asian Development Bank and the Governments of Australia and New Zealand—believes access to finance is a critical factor in developing a strong Pacific MSME sector. On that basis, PSDI is working with key partners across the region to develop and roll out new lending products which make it easier for MSMEs to borrow.
Lenders typically require collateral to secure a loan, and their first choice is generally a mortgage over a property. Most MSMEs in the Pacific, however, do not own land. Even farmers often work on a “right of use” basis, rather than with direct land ownership. To address this, lenders must consider alternative forms of non-land collateral, such as crops, inventory, machinery, and accounts receivable—commonly known as “movable assets”. One of the primary tools used to enable lending against such movable assets is known as a “secured transactions collateral framework”.
A secured transactions framework allows lenders to register their legal rights over a movable asset pledged for collateral, and enables an online registry to record this information. Secured transactions frameworks are an important part of modern financial architecture globally, creating a pathway for increased access to finance. Such alternatives to standard lending are critical for business recovery and growth, particularly given the additional challenges Pacific MSMEs face due to COVID-19.
As movable assets are often part of commercial arrangements, such as crop supply contracts, the framework can assist lenders beyond the attainment of collateral. By engaging with both producers and product buyers, lenders obtain a better financial understanding of their clients’ business and cash flows, improving overall lender confidence.
Secured transactions reforms enable borrowers to use assets other than land and buildings, such as vehicles, machinery, inventory, and accounts receivable, as collateral for loans.
PSDI has worked with governments across the region to develop and implement secured transactions frameworks, including registries, and has supported lenders to develop and administer best practice financial products taking advantage of secured transactions frameworks. This work has taken place in 10 Pacific countries, including Cook Islands, Fiji, Papua New Guinea, Samoa, and Solomon Islands.
In 2017, a secured transactions framework was established in Fiji, resulting in the 2019 launch of Fiji’s Personal Property Securities Registry. As of 30 June 2022, more than 79,500 security interests have been registered in Fiji using the framework.
The Fiji Development Bank (FDB) has used this framework to design and launch a series of new lending products for the agriculture sector, with PSDI support. FDB has already established a ginger farmer finance product and rice farmer finance product, with other tailored packages expected to launch in 2023.
FDB chief executive Saud Minam is leading his bank’s pioneering approach to Pacific agri-finance, which is overcoming some of the challenges of MSME lending.
“We know Fiji’s agriculture sector is a key driver for growth in the overall Fijian economy. We want to make sure our farmers and growers are not constrained from a lack of access to funds when needed,” Mr Minam said.
Timely financial access enabled Labasa farmer Hemant Kumar to invest in equipment that has simplified rice farming and harvesting.
“Purchasing machinery such as a power tiller and tractor have been made possible through financing options by FDB. I have also been able to expand my farm and I’m looking forward to increasing the volume of rice farming,” Mr Kumar said.
FDB sees its engagement as an ongoing process, adapting as needed to meet the demands of Fiji’s agriculture and business sectors. Mr Minam said he hopes other lenders, both in Fiji and across the Pacific, take advantage of the secured transactions reforms to develop new products. FDB is open to sharing its experiences with other Pacific lenders.
PSDI continues to support the rollout of secured transactions frameworks and product development throughout the Pacific, and to talk with lenders about new opportunities to support the MSME sector. It hopes that as commercial lenders become increasingly familiar with secured transactions frameworks, they develop new loan products—meaning more loans out the door, more business growth, and improved economic growth and prosperity in the Pacific.