Collateral VS personal loan guarantors

From: "Seppo Sipilä" <seppo.sipila@gmail.com>

15 years ago, I worked for several years as a
fund economist, providing loans mainly to SMEs in
Africa. Among the borrowing conditions there was
one characteristic thing: our fund did not take
property as collateral. Alternatives, such as
personal guarantees (but many others as well)
were acceptable. The rationale (of the
consequently weak collateral) was that at
default, the borrower had no fear of losing one’s
house, while our lender-Fund did not have to
engage in managing odd properties around Africa.

Despite these two advantages, our fund did not
benefit from personal guarantees. Our notion was
‘personal guarantee is just a piece of paper’.
But could it have worked better, had each party
worked hard to make it work? Could the value of
paper been better had there been sanctions and
legal enforcement? In the long run, could
personal guarantees (and credit referencing if
necessary) have a role and sustain separated from
lending business and without support from land
registries, if the latter just do not exist?

After all, it is always people who for various
reasons are willing to engage in guaranteeing.
Titles to land or premises by the borrowers or
guarantors are pawned in. Sometimes the
properties are oversized vs. the loans. My
presumption now (while I am back working in
Africa) is that for lending here, personal
guarantees could to a degree substitute land
registries and title books and thus bring some
parts of the ‘dead capital’ (in Hernando de
Soto’s terms) alive? If properly recorded and
registered, to a degree, the personal guarantee
from chiefs, local businessmen or patrons would
be adequate, without assets traded in? That is,
if they were willing and if the banking system would cope?

Personal loan guarantors – “I shall pay back if
you are unable“- expose positive yet responsible
sentiments of care of those people one has
confidence in. In a way they represent better
discipline than donations to charity, where funds
once granted are never expected back. They
contrast positively with peer pressure of
microfinance where ‘neighbourhood watch’ speeds up repayments.

(Microfinance, microinsurance and income
generating activities probably secure optimum
allocation of scarce financial resources within
societies. These societal funds are
characteristically weaker what comes to risk
taking, expanding business and gaining wealth by
exploiting opportunities outside of the society.
Law enforceable personal guarantees given to
lending institutions would focus on the latter market.)

In towns and villages the potential guarantors
represent omnipotence and influence. Saving face
and keeping a tight rein on liabilities is likely
always in the guarantors’ own interest. It is
also in the banking institution’s interest to
estimate the guarantor’s ability to repay. The
lender probably needs just a fraction of the
guarantor’s property value. What he / she needs
is partial guarantees, expressed in money terms
and relative to the loan. Bigger needs and many
partial guarantees from different persons, each
one with limited liability could be given. To be
more palatable for the banks, respective personal
guarantees may be duly stitched and registered at
notary offices. Amended laws could perhaps link
registered guarantees ultimately with properties even without title book bonds?

I would like to learn user experience among
CommunityDevelopmentBanking networks if personal
loan guarantees been exploited for confidence
based business loans in place of (unrecorded)
assets? Or, is something else always pawned?
Given that the banks are conservative, in those
countries where land registry systems earlier
were underdeveloped, did only introduction later
of title books substantially increase lending
volumes? And, are personal guarantees perhaps
considered being a threat (strong guaranteeing
potentially strong) anywhere to the ‘democratic’
(=available to all society members) microfinance?

Seppo Sipilä
BSPS II
P.O.Box 5789
Dar es Salaam, Tanzania
tel +255 76 3833588
seppo.sipila@gmail.com


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