New collateral options

Friday, 22 June 2018 00:00 -     - {{hitsCtrl.values.hits}}

Cabinet this week decided to introduce a new law to allow movable assets to be used as collateral to assist entrepreneurs and small and medium enterprises to have greater access to finance. The move, which will upgrade laws made in 2009, is aimed at encouraging economic activity and spreading it beyond urban centers.    

The decision was taken to change the existing laws as they do not consider movable property, which could include computers, vehicles and other goods, to be sound collateral in obtaining bank financing, limiting financing options for the SMEs. Once the new laws are passed in Parliament, SMEs will be able to leverage the majority of their assets for credit facilities with movable assets as collateral. 

In the proposal to present the new bill to the Cabinet for approval, Prime Minister Ranil Wickremesinghe, in his capacity as the Minister of National Policies and Economic Affairs, stressed the need for amendments to existing laws to remove hurdles to economic growth. Vehicles, especially three-wheelers, are already used as collateral for personal financing needs, but they have limited application in raising capital or providing long-term loans as needed by businesses. 

The new law will also facilitate the implementation of a secure transaction registry which will increase access to finance for SMEs by creating a unified legal and institutional framework that allows them to leverage their movables as collateral.

One of the main issues that startups and entrepreneurs in Sri Lanka have is funding. The other is adequate mentoring and networks linking them to the market. Both of these are needed if banks are to loosen their demand for collateral. Officials are well aware of this and have raised the point that some loans are already guaranteed by the Central Bank, reducing the risk to financial institutions. But clearly more needs to be done by the financial industry, which concentrates the majority of its resources on promoting consumption rather than the manufacture of tradable goods and services. 

The burden of capital becomes even more difficult in Sri Lanka as there are limited efforts by banks to tailor loans or other products to these small-time entrepreneurs. Angel investors too are few on the ground and mostly limited to the IT sector. Crowdfunding and other options are also in their infancy in Sri Lanka and most would be wary of backing anything without adequate credibility. It is a vicious cycle for entrepreneurs as they try to build a sustainable business. 

It is also important to build financial literacy in the public and raise awareness on what would be the best ways to access finance but still contain the level of indebtedness in the country. Multiple finance options should not mean that taxpayers have to repay loans obtained with the aim of personal profit.  

One thing is clear: there are many pieces of the puzzle that need to be worked on simultaneously. Banks providing loans is only part of this effort and more if not equal effort needs to be made to formulate competent business plans, target markets and accounting practices to make ideas flower. 

The Government in its latest Budget announced about Rs. 15 billion to be earmarked for loans for entrepreneurs but this policy needs to be supported by many other stakeholders to become a sustainable measure. A start has been made but other pieces of the puzzle need to come together too.

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