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 Economía Cubana (CEEC).
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