Guatemalan merchants, small and medium industrialists, farmers and others in the lower economic rungs will be backed by a newly enacted secured lending law that University of Arizona students and legal scholars helped to draft.
The law, just adopted by the Congress of Guatemala, essentially allows for more access to the credit market and establishes protocol that will provide small to medium manufacturers the ability to grow their companies and compete with other expanding markets.
It is a “historic” move and a huge leap forward from the traditional law, said Boris Kozolchyk, founder and executive director of the National Law Center for Inter-American Free Trade, a Tucson-based nonprofit research center.
Kozolchyk is also the Evo DeConcini Professor of Law at the UA's James E. Rogers College of Law. He said the work of the center, which is affiliated with the college, led to the new law being adopted.
The new law moves the lending practice beyond “micro lending, or the loan that is just the survival type,” said Kozolchyk, who is recognized around the world as international commercial law expert.
"This is the loan that takes you to the next stage – where the same person can start hiring other people," he said, adding that the law provides a "line of credit" to those who have historically not qualified for such help.
“At that point, you’ve graduated to being a business person," he said.
Central American banks have not been accustomed to this type of lending, which sometimes requires risk-taking, Kozolchyk said. He was hired by the Guatemala government through the National Law Center as a consultant to work on the law.
Kozolchykand others, including UA graduate students, worked with various divisions of the Guatemala government, from its central bank to its ministry of economy, as well as cooperative organizations.The group used the “model law” created by the Organization of American States as inspiration for the draft.
Kozolchyk’s research into such issues in Central America dates back to the mid-1960s, when he began a pioneering study into the credit structure in Latin America. And, in September, he participated in a "ground-breaking" conference in Mexico City on the economic development in Latin American countries.
Kozolchyk, one of those who helped draft the law for Guatemala, said it will help dissolve a number of problems.
“The bankers would basically only lend to very few customers, sometimes people they knew and trusted very well – family and friends,” he said. “Another problem was that lawyers were not used to this kind of law because it is not the kind of thing that was in the laws and codes of the 19th century, which were the ones they were working with,” he added.
Often, the law required borrowers to hand over collateral up front or mandated that they have a specific type of security: land.
But, as UA law college alumna Mariana Silveira points out, few of the farmers, merchants, artisans and others held land, which made the need for modern law all the more crucial.
Some small business owners may only have booklets detailing their various accounts and inventory. Farmers may be working with no machinery. Many rely on word of mouth and have little documentation that can prove the success of their business.
The law enables people in those situations, and others, to "basically access credit by using what they already have – their equipment, inventory, accounts – and not worry about what has traditionally been named property," said Silveira, who graduated with a master’s degree in trade law from the College of Law in 1997.
Silveira, now the National Law Center’s research director who helped conduct comparative legal research for the project, said the law is not just about access, “but also about creating a system that works and is affordable.”
Another function of the law is to “guarantee that the creditors are going to have access to procedures that would facilitate the recovery of money due in the event of default,” she said.
Silveira also said the dollar amount of loans will likely increase "because lenders have more reliance on the system and less risk in recovering debt."
Marek Dubovec, a 2004 graduate of the UA College of Law who is now seeking his doctorate at the law college, said this was “one of the hottest topics” of the time.
While the law is great for Guatemala, Dubovec said he now hopes others will follow suit. During his research, he found that when other regions have adopted similar laws, it had a way of creating a “harmonized market.”
Kozolchyk said, “This is the first law of this type to be enacted in Central America. They have not had this access before.”
Already, other countries including Honduras and Mexico are looking at ways to incorporate the law, Kozolchyk said.
That means the law could revolutionize the region and affect numbers of people “literally in the millions,” he said. “There is enormous potential for this.”