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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 This post transferred from the cdb-l mailing list |