UNCITRAL Guide on Facilitating Access to Credit for Micro, Small and Medium-sized Enterprises (2023)

The UNCITRAL Guide on Facilitating Access to Credit for Micro, Small and Medium-sized Enterprises constitutes an important legislative and policy tool aimed at addressing the financing gap faced by these enterprises, which most often arises from certain financing constraints and the inability of such enterprises to meet the conditions for granting them loans.

The UNCITRAL Guide provides a comprehensive framework for legal and regulatory reforms that States may adopt to enhance the ability of these enterprises to access credit in a fair and sustainable manner.

Sources of Credit and Capital Available

1. Support provided by friends and family: This type of financing is characterized by its ease of access and the fact that friends and family, in most cases, do not need to obtain security interests or review the enterprise’s plans, in addition to the flexibility of the financing terms and the ease of repayment methods compared to commercial credit. (1)
2. Commercial credit: This includes secured and unsecured bank loans as well as loans provided by other financial institutions such as investment funds, which enterprises face great difficulties in obtaining due to their lack of sufficient collateral to secure loans. The Guide lists movables that may constitute security for lenders, including jewelry, furniture, and household appliances, as evidence of the small business owner’s intention to repay the loans, rather than as an actual source of repayment. (2)
3. Crowdfunding: This consists of raising money from a large number of individuals, each contributing a small amount of money, usually through an electronic platform operated by a financial technology company. (3)
4. Leasing: Operating leases or finance leases make it possible to finance the use of certain equipment or machinery and the assumption of obligations arising from their use, such as maintenance, with an option to purchase such equipment at the end of the lease term. (4)
5. Financing secured by receivables or warehouse receipts: In this case, financing is secured by goods or services or by a direct sale of such goods at a discounted price. Small enterprises that have customers with good creditworthiness may obtain loans on better terms than bank loans. (5) Warehouse receipts issued against deposited goods or movables may also be used as security for financing granted to the enterprise. (6)
6. Microcredit: The UNCITRAL Guide examines the possibility of providing small, less formal loans to enterprises that do not involve written agreements, which may be guaranteed by members of the local community to which the borrower or small business owner belongs. (7)
7. Public financial institutions: Some States ensure the existence of financial institutions that provide financing or financial services in general to categories that face difficulties in accessing credit, including micro, small and medium-sized enterprises, such as development banks established by governments, sometimes in partnership with international development institutions or banks. (8)
8. Islamic finance: Islamic finance, which prohibits the payment of interest on loans, may provide an opportunity for small enterprises to obtain financing by providing other forms of security for borrowed funds, including profit-sharing in the project’s returns or direct participation in the results of transactions. (9)

Measures to Facilitate Access to Credit

This part of the UNCITRAL Guide addresses a set of legislative and regulatory mechanisms aimed at alleviating the regulatory obstacles that hinder access by micro, small and medium-sized enterprises to credit financing. It also provides an analysis of these mechanisms, accompanied by practical recommendations on how to design and implement them effectively to achieve the desired outcomes, as follows:

• Equal access to credit

Granting all borrowers equal opportunities to obtain credit and not discriminating among them on the basis of color, gender, or religion is a fundamental rule that must be satisfied before embarking on any reforms in this regard. Preferential treatment granted by some national systems to the State’s own nationals does not fall under the heading of inequality, as it is based on public interest considerations, such as supporting the economy and local innovation and providing jobs for citizens. (10)

• The legal framework for access by micro, small and medium-sized enterprises to credit

The UNCITRAL Guide sets out several recommendations to enhance access by micro, small and medium-sized enterprises to credit, the most important of which are the following:

• Formalization of enterprises

The operation of some small enterprises within the informal economy — that is, outside the visibility of the competent authorities — may be a fundamental reason for their inability to obtain financing. In some States, the process of transitioning these enterprises into the formal economy is costly and burdensome. Therefore, recourse may be had to simplified rules that facilitate the transition of these enterprises into the formal economy by focusing on the ease of establishing and registering micro, small and medium-sized enterprises, and creating a simplified commercial register that does not affect legal certainty in their establishment, and by focusing on facilitating the regulation of these enterprises’ operations and protecting their rights through the adoption of the UNCITRAL Legislative Guide on Limited Liability Enterprises. (11)

• Developing the secured transactions regime

This recommendation focuses on the need to draft laws and regulations in a way that facilitates the creditor’s ability to realize the security interests provided by small enterprises when obtaining loans, in order to reduce credit risk. This is achieved by using movables as collateral in lending under a simplified secured transactions regime, as well as using immovable assets as security. One of the most important applications is small enterprises operating in the agricultural field that face difficulties in using land they own but for which they do not possess formal title deeds as security for credit. (12)

• Personal guarantees

The UNCITRAL Guide defines a personal guarantee as “a promise by a third party to perform the debtor’s obligations to the creditor.” Personal guarantees support lenders in providing credit to micro, small and medium-sized enterprises on terms more suitable for such enterprises (at a lower interest rate or longer repayment periods) where such enterprises lack adequate security to guarantee the loan granted to them. (13)

The Guide also emphasizes the need to establish regulations to protect guarantors who lack experience (such as family members and friends), in addition to providing certainty for all parties to the agreement by providing sufficient information to inexperienced guarantors about the enterprise, the terms of the guarantee, and all legal risks. The UNCITRAL Guide cites as an example the treatment by some insolvency laws of claims by family members against small enterprises as being ranked lower than claims by other categories. (14)

• Public credit guarantee schemes

Some States have issued schemes to guarantee credit granted to micro, small and medium-sized enterprises by guaranteeing partial or full repayment of the loan in return for fees paid by the guarantor institution or the enterprise or both. The guarantor institution may be the State itself, bilateral or multilateral international initiatives, a private sector entity such as professional or industry associations, or ultimately an institution managed by the micro, small and medium-sized enterprises themselves. (15)

• Assessment of the creditworthiness of enterprises

The UNCITRAL Guide recommends making financial information on micro, small and medium-sized enterprises available at both the domestic and international levels, developing credit reporting systems for these enterprises, and using alternative data such as digital footprints. (16)

• Dispute resolution

The UNCITRAL Guide encourages the use of non-judicial mechanisms for settling disputes between micro, small and medium-sized enterprises and lenders, such as banking mediation and financial ombudsmen, as well as simplifying judicial procedures through courts or chambers established for small claims. (17)

• Enforcement

States must facilitate enforcement procedures to reduce time and costs for lenders and to ensure the existence of effective mechanisms for recovering unpaid amounts. (18)

• Supporting enterprises in financial distress

The UNCITRAL Guide supports the adoption of early-warning measures for financial problems and the provision of mechanisms to restructure distressed enterprises outside the framework of insolvency (bankruptcy) laws, with the possibility of using artificial intelligence or big data to reduce restructuring costs, in line with the UNCITRAL Legislative Guide on Insolvency Law (Bankruptcy). (19)

What is the primary objective of the UNCITRAL Guide regarding the financing gap faced by MSMEs?

The primary objective of the UNCITRAL Guide is to serve as a legislative and policy tool designed to address the financing gap encountered by micro, small, and medium-sized enterprises (MSMEs). This gap typically stems from specific financing constraints and the frequent inability of these enterprises to satisfy the standard conditions required for obtaining loans.

To achieve this, the Guide provides a comprehensive framework for legal and regulatory reforms that States can implement to improve MSMEs’ ability to access credit in a fair and sustainable manner. It specifically targets regulatory obstacles through practical recommendations on designing and implementing mechanisms that facilitate credit financing

What non-judicial mechanisms are encouraged for settling disputes between lenders and small enterprises?

To settle disputes between lenders and micro, small, and medium-sized enterprises (MSMEs), the UNCITRAL Guide encourages the use of non-judicial mechanisms such as:

• Banking mediation: A process where a neutral third party helps the lender and the enterprise reach a voluntary agreement.
• Financial ombudsmen: Independent officials who investigate and resolve complaints between financial institutions and their customers.

In addition to these non-judicial options, the Guide suggests simplifying judicial procedures by establishing dedicated courts or chambers specifically for small claims.

Overview of UNCITRAL Guide on Facilitating Access to Credit for Micro, Small and Medium-sized Enterprises (2023)

The UNCITRAL Guide serves as a strategic roadmap for governments to bridge the financing gap hindering small and medium-sized businesses. It details a diverse array of funding sources, ranging from traditional commercial credit and microfinance to innovative models like crowdfunding and Islamic finance. To improve loan eligibility, the text advocates for legal reforms that simplify business registration and modernize secured transactions involving movable assets. It also emphasizes the importance of personal guarantees and public credit schemes to mitigate risks for lenders while protecting inexperienced guarantors. Furthermore, the guide suggests enhancing creditworthiness assessments through digital data and implementing efficient dispute resolution and insolvency mechanisms. Ultimately, these recommendations aim to create a fair and sustainable financial ecosystem that fosters growth and economic inclusion for smaller enterprises.

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Sources:

1. UNCITRAL Guide on Facilitating Access to Credit for Micro, Small and Medium-sized Enterprises, 2023, p. 8.
2. UNCITRAL Guide, p. 9.
3. UNCITRAL Guide, p. 11.
4. UNCITRAL Guide, pp. 13–14.
5. UNCITRAL Guide, p. 15.
6. UNCITRAL Guide, p. 16.
7. UNCITRAL Guide, pp. 18–19.
8. UNCITRAL Guide, pp. 19–20.
9. UNCITRAL Guide, pp. 20–21.
10. UNCITRAL Guide, p. 24.
11. UNCITRAL Guide, pp. 26–29.
12. UNCITRAL Guide, pp. 29–35.
13. UNCITRAL Guide, p. 39.
14. UNCITRAL Guide, pp. 40–42.
15. UNCITRAL Guide, pp. 44–45.
16. UNCITRAL Guide, pp. 49–54.
17. UNCITRAL Guide, pp. 54–57.
18. UNCITRAL Guide, p. 58.
19. UNCITRAL Guide, pp. 59–61.