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By Pavel Vidal Alejandro
In the Gaceta Oficial No. 40 the government published the new framework in which the self-employed, micro businesses and private farmers, starting Dec. 20, will be able to be financially active. This new legal framework puts them practically on equal footing to the financial services and credit a state enterprise can access.
The new financial regulations equally apply to the soon-to-be-coming non-agricultural cooperatives and other non-state entities that may be allowed in the future. The regulations also leave the door open to loans for consumer good, automobile and home purchases, even though they state that this won’t be a priority for now.
Three state banks, Banco Metropolitano, Banco de Crédito y Comercio, and Banco Popular de Ahorro, will be in charge of responding to the new loans and financial services. The self-employed and micro entrepreneurs may apply for loans starting at 3,000 non-convertible pesos (CUP) — US$125 at current exchange rates — while loans for private farmers start at 500 pesos CUP, or $21. These loans can be used both for working capital or investment purposes. There is no upper limit for the loan amounts. The Central Bank will set minimum and maximum interest rate ranges.
Loan applicants must specify the viability of the business and guarantees. In case of repeated non-compliance, the financial institution will take legal steps, according to the guarantees defined in the contract. As collateral, applicants may use their own bank deposits or those of third persons, movable goods, mortgages of vacation homes, or unimproved lots, among others. All these guarantees could be subject to seizure. The regulations establish that the debtor’s permanent home may not be put up as collateral.
The banks may, furthermore, open checking accounts in CUP or convertible pesos (CUC) for non-state sector clients. The opening of a checking account is obligatory for businesses with gross annual revenues exceeding 50,000 pesos CUP (US$2,083).
Another new financial measure is that the entire non-state sector may use, in addition to cash, the following payment instruments: a) bank transfers, b) checks, c) payment order, d) debit or credit card, e) local letter of credit, f) demand bill, g) promissory note, and h) others that are used in banking.
It’s difficult to make an evaluation of the new measures before they have been put to practice. Even so, some general traits about potential and challenges can be anticipated.
The opening of credit by state banks will allow to add new resources to the disposition of private undertakings. In principle, the banks would be better qualified to select projects with higher profitability and lower risk, which in turn would increase efficiency in the allocation of temporarily free resources in the economy.
This way, a proliferation of informal finance would be avoided. Until now, capital for private businesses has originated from savings of the entrepreneurs, remittances from abroad, and informal finance resources (loan from a family member, friend or other person).
A foreseeable challenge is that, effectively, these three banks — whose basic experience and knowledge was formed under the logic of credit for medium-size and large enterprises — will be able to speedily assume the principles that govern microfinance. An alternative, more attuned with international practices, would have been to create microcredit banks or other financial institutions that solely specialize on serving this market segment. The formation of mixed-capital microcredit institutions (for example with some Latin American microcredit bank) would multiply the financial, logistical and know-how potential of Cuban banks facing the opening of a non-state small-business sector.
The possibility of non-state sector companies opening checking accounts and using all payment instruments has the following positive effects:
•Their operational costs will shrink. By way of banks, they would be able to pay their taxes, Social Security contributions, utility bills, and more. This would reduce the risk and cost of handling and accumulating excessive amounts of cash.
•Their links with state companies and institutions would begin to be financially viable.
•It would facilitate legal control, particularly it would contribute to reducing fiscal evasion.
For monetary policy, the opening of banking for the non-state sector has also implications. It can bring about considerable changes to the composition of demand for money. Once credit expands to the non-state sector, new financial transmission mechanisms will appear, and it will increase the ability for monetary policy action to influence economic activity in the short term, and to control inflation.
The new financial services also represent challenges for the Cuban banks, which seem to have already reached capacity in serving their existing clientele. That clientele, moreover, has little access to alternatives such as online or telephone banking, magnetic cards and automatic teller machines. Therefore, bottlenecks in providing financial services to the private sector will likely be forming.
The banks and the non-state sector will face another type of challenge to advance within the new financial framework, due to the very economic environment in which they must function. Dual currencies and exchange rates, lack of access to a wholesale supplies market, import restrictions, domestic financial crises, limited convertibility of the currencies, deficiencies in the incentives system of state companies would be among the most significant obstacles.
Even so, the new measures still seem very positive, because they signal the real acceptance of new actors within the Cuban economic model, because of the positive impact they must have due to their performance, and because of the potential (and challenges) of an economy that will be more accelerated by banks and credit.
Pavel Vidal is an economist with the University of Havana’s Centro de Estudios de la EconomĂa Cubana (CEEC).
