Microfinance, Regulation and Uncollateralized Loans to Small Producers in Argentina

The essence of microfinance is uncollateralised loans to borrowers without a constant source of income from a wage job. Lack of collateral, however, increases the costs for lenders to judge risk and to enforce repayment. How does collateral-based regulation affect access to microfinance for small producers in Argentina? The analysis here suggests that collateral-based regulation in Argentina does not have a big effect on access to microfinance for small producers. Collateral affects the costs of lenders—and thus the price of loans to borrowers—much more as an ex post hostage than as an ex ante signal. Chattel mortgages on movable goods fail as hostages not because of regulation but rather because of a weak legal framework for security interests. Likewise, the lack of a comprehensive credit bureau discourages uncollateralised loans since borrowers cannot transfer their reputations among lenders.

Probably the tightest constraint on uncollateralised loans for small producers is the extreme demand from urban households whose steady incomes from wage jobs make them low risks and enable them to pay high interest rates. Thus there is some scope to improve access to small loans for small producers through interventions aimed at chattel registries and credit bureaux. In the long term, however, most improvement will come not from decrees that attempt to direct loans to targeted niches but from the maintenance of the conservative regulatory framework that so far has successfully strengthened and restructured a financial system that was in shambles. More faith in banks will deepen the financial system and increase the amount of deposits, decrease their cost, and lengthen their term structures. In turn, this will increase the supply of loanable funds, decrease the cost of loans, and eventually increase access for small producers.