Credit opening and entrepreneurship in Cuban economy by IPS Cuba

Credit opening and entrepreneurship in Cuban economy By: Jessica León Mundul and David J. Pajón, professors, Faculty of Economy, University of Havana The opening up of credit and financial facilities since 2011 for the non-state sector and the population in general are a major challenge for the banking sector, which should include practices such as greater use of micro-finances and micro-credits Transformations in the Cuban economic model: new forms of property and management While another, more recent date could be indicated as a turning point for the implementation of economic policy in Cuba, a July 26, 20071 speech by then-acting President Raúl Castro marked an important moment: the government’s explicit statement that it intended to initiate a process of substantial change to the Cuban economy. The changes that have been set into motion since then reflect, above all, the need to survive (taking into account the exhaustion of the Cuban economic model, in stagnation after the incomplete reforms of the 1990s), even though the political discourse since then has included elements that would lead us to believe that the country’s authorities view at least some of the more substantial changes as strategic and not tactical. This latter aspect is not just a signal for social groups whose mobilisation is essential to this process of change; it is also a necessary condition for success (although insufficient, of course), something that the 1990s reform lacked, and considered to a good extent as concessions by some of its main advocates.2 In general, the process of change accelerated after the government’s official gazette published a set of measures3 that broke with practices that had become entrenched during Cuba’s revolutionary period. Added to that was the discussion and presentation of the Economic and Social Guidelines of the Sixth Congress of the Communist Party of Cuba (PCC) and the creation of the Permanent Commission for

See http://www.granma.cubaweb.cu/secciones/raul26/index.html See reflections on this aspect by José L. Rodríguez, Economy and Planning Minister during the crisis period, in M. Espina, J. L. Rodríguez, & J. Triana; R. Hernández: “El período especial veinte años después,” Temas magazine, No 65, 2011, at http://www.temas.cult.cu/sumario.php?numero=65&Submit.x=9&Submit.y=7. 3 Some of the most notable are the regulations for implementing the process of “labour availability” (the term refers to the reduction of state jobs based on the criteria of efficiency); the expansion of self-employment, and the possibility of hiring labour for forms of non-state production. Regulations for these areas may be consulted in numbers 011 and 012, “Ext. Especial,” October 2010, Gaceta Oficial de la República de Cuba, at http://www.gacetaoficial.cu. 2

Implementation and Development, charged with putting into practice the intentions of the policies outlined in the guidelines document. The call to “update the Cuban economic model” has become the central slogan of this process of transformation, whose real nature as a break with the past can be appreciated if we understand what “economic model” means. This concept refers to the institutional and organisational aspects that make up the foundations of an economy’s functioning, and which tend to vary relatively little in time. Their optimal configuration is decisive for good economic performance.4 Almost every change included in the model proposed in the final version of the Guidelines, or materialised in a given policy measure, involves major transformations, and moreover, none is independent from the rest. Nevertheless the duo of weight of different forms of property and forms of managing social property emerges quite forcefully in the document and in political discourse. On the one hand, Guideline No. 2 expresses the intention of fostering non-state forms of management, which also involves, directly or indirectly, an increase of non-state property. On the other hand, with both insufficiencies and contradictions, various measures have been imposed (and others announced, especially an opening to nonagricultural cooperatives) that are encouraging a proliferation of private businesses. All of this includes the possibility of hiring labour, exchange with the state sector, the process of “labour availability” [layoffs from state enterprises] and greater access to banking and credit facilities for non-state forms. So much importance has been conceded to the proliferation of non-state production forms5 that at various times it has been announced that their contribution to the GDP would rise to 40 percent by 2015.6 With respect to employment, in early December of 2012, the number of workers in the self-employed, or private, sector rose to more than 395,000, which was 237,629 more than in September 2010,

According to a proposal developed by O. Fernández, the economic model of functioning would be composed of six components or articulating central points: the weight of different forms of property; forms of management of social property; the economic organisation of the State; the organisation and structure of aggregate markets; mechanisms for the regulation of production, and the weight of different sources for the distribution of wealth. This article may be consulted at http://www.eumed.net/cursecon/ecolat/cu/2011/ofe.html. 5 On this point, we are referring to figures that illustrate the phenomenon of the expansion of non-state forms in quantitative, not qualitative, terms. Another analysis that considers the non-existence of sufficiently-supplied input markets, or the limited list of authorised occupations for private workers, and therefore, the type of goods and services with which they can contribute to the GDP, would describe as extremely limited the importance given to non-state forms of property and management. 6 According to statements by Esteban Lazo, vice president of the Councils of State and of Ministers, during a television programme that aired in April 2012, within five years, 40 to 45 percent of Cuba’s GDP will be produced by different forms of non-state production. See http://www.prensa.com/impreso/economia/aumentara-el-aporteprivado-al-pib-de-cuba/88317.

before regulations went into effect that made it easier to participate and work in this sector.7 Now, beyond any questions regarding estimated contributions to the GDP of these new forms, there is qualitative reasoning regarding the internal dynamics generated within this sector. The list of some 180 activities that are authorised for selfemployment practically consigns professionals into the background, because they are jobs that require little knowledge. This is a cause for concern regarding the quality of almost half the country’s GDP, based on goods and services with little added value. Nevertheless, there is no anticipation in the short term of a transition from “positive lists” to “negative lists,”8 or even a substantial expansion of the existing lists. Policies promoting innovation and aimed at the non-state sector also remain nonexistent. While appeals for increased productivity in state enterprises generally continue to be a constant (although generally based on announcements, moral incentives and savings), and despite the stated intention of promoting non-state forms and making it public that they are expected to substantially increase, authorities seem to consider the sector basically as an employment cushion for the process of “labour availability” — capable of providing a very basic range of products and services (especially food and transport) that the State has been shedding gradually — and as a source of taxes. Currently, no actions are being taken to explicitly increase the innovative capacity of this sector, even though this type of dynamic could be generated implicitly or indirectly. It has been assumed that the opening up to private activity per se is a driving force for innovation that does not need to be stimulated. Or, simply, it has not been considered as basic that this sector should produce with dynamics of growing efficiency. Despite an underestimation of possible contributions by non-state forms of production and, therefore, the absence of a number of measures that would complement the changes underway, the mere opening up of a group of activities to this sector and the automatic reaction of agents to this have required changes to traditional forms of regulation of production. These changes include the opening up of credit and financial facilities for the non-state sector and the population in 7

Estimates based on figures provided by Marino Murillo at a November 30 meeting of the Council of Ministers (see L. Martínez and Y. Puig: “Planificar bien: vital para el desarrollo económico,” Granma newspaper, Dec. 3, 2012) and A. Leyva: “Pasos acertados por un camino complejo,” Granma, July 24, 2012. At http://www.granma.cubaweb.cu. 8 The “positive lists” provide information about a group of activities that the non-state sector is authorised to carry out. The “negative lists” are a variant that explicitly states, exclusively, the activities that this sector cannot carry out, and by its nature, enormously expands the spectrum of production and service categories that can be practiced by non-state forms.

general, and its effects and true potential — unnoticed until now — can only be understood by starting with an analysis of the new regulatory framework. New credit policy: regulatory framework Changes to the banking and credit sector were initially outlined in the Guidelines document and subsequently took form by way of Decree-law 289 and Resolution 99 of the Central Bank of Cuba in 2011. From the standpoint of transformations to the economy’s functioning, the role of these changes within the set of measures designed for the “updating” process may be viewed in several ways. On the one hand, they assume a change to the praxis of economic policy in Cuba, where the inducement of behaviour among economic agents is moving from historic administrative mechanisms to the opening-up of access to the financial market for sectors of the population and non-state forms of production. Decree-law No. 289, published in the official gazette (Gaceta Oficial de la República) in November 2011, covers the principles and general procedures that regulate credits and other banking services for individuals. According to this legal framework, credit recipients include authorised (licensed) self-employed workers; small farmers who legally hold land, as well as other forms of non-state management to be authorised in the future,9 and individuals who need to carry out construction on their homes or consume goods. For its part, the Central Bank of Cuba sets the general regulations for granting credits to individuals as per Resolution No. 99 of 2011, indicating that the state agencies charged with this process are the following banks: Banco Metropolitano, Banco de Crédito y Comercio (BANDEC) and Banco Popular de Ahorro (BPA), based on the branches that they have in every municipality in the country. It is striking that these institutions will not only be charged with granting credits to the new sector, but also will be able to provide other banking services, such as the opening of checking accounts in Cuban or convertible pesos, thus furthering the use of payment instruments such as drafts, checks and others. Therefore, the new financial legal framework broadens (at least formally) the role to be played by the non-state sector, by providing equal access to financial and credit services for those [economic] agents and Cuban state enterprises, and thus promoting their expansion and development. In analysing the particulars of granting credits solely for non-state forms of production, we see that for self-employed workers, financing may be granted for a minimum of 3,000 Cuban pesos for terms that do not exceed 18 months for working capital10 and five years for investments, while small farmers may apply for credits 9

This refers fundamentally to new, non-agricultural cooperatives. This includes the acquisition of raw materials, materials and inputs.

for a minimum of 500 Cuban pesos. In neither case is any limit specified for the granting of credits. It is striking that all of the credits offered are solely in Cuban pesos, assuming that the demand for convertible pesos will be met by the CADECA currency exchange market. In addition, the credits may be granted in cash or by means of the issuing of payment instruments, in one or several tranches of credit, and interest is due from the moment the availability goes into effect. The amounts and periods of amortisation for credits granted will be set by agreement between the bank and applicant based on the purpose of the credit, its risk level and the activity to be financed, which will be documented in a contract. This will also include the possibility of a grace period for making payments on the principal. Rates of interest on these credits will be determined by adding a margin of 0.25 percent and 2.5 percent to rates of interest on fixed-rate deposits (from three months to five years) in Cuban pesos, which implies that currently, these interest rates could vary between 2.5 percent and 9 percent according to the purpose of the credit, its amortisation period, the risk analysis conducted by the bank, and the clientâ&#x20AC;&#x2122;s status (see Table 1). Table 1. Active rates of interest for working and investment capital

Months

Lower limit

Higher limit

2.50

3.50

3.00

4.00

4.50

5.50

7.50

6.50

8.50

7.00

9.00

Source: Based on Circular No. 2-2012 of the Central Bank of Cuba. One very controversial issue in the Resolution is the requirement of guarantors for credit recipients, because it is based on the principle of covering 100 percent of the loan principal plus interest. Guarantors may include the following:



Solidarity Guarantors:11 a minimum of two solidarity guarantors is required, and a risk analysis is conducted to ensure that they have the capacity to pay off the loan in case the applicant fails to do so.



Pledge of savings accounts and fixed-rate deposits that are opened in the same bank branch.



Cession of certificates of deposit with open terms in certain commercial banks.

Another set of guarantors will be considered by banks in the near future, but the economic mechanisms for their use have not been created yet. These include: drafts or bonds backed by a financial institution; movable items or assets; and mortgages on homes located in recreational or summer areas and empty lots. Broadly speaking, these are the principal aspects of the new regulatory framework that is being opened by the financial market for new forms of non-state production. Some reflection is now needed, in the light of international experiences and the outcome of this policy since its implementation. Some reflections and the impact of the credit policy To be able to understand the features of Cuba’s credit and finance policy, it would be good to briefly reflect on whether the introduction of credit mechanisms oriented toward non-state forms of production have been based on traditional forms of granting credit or whether they have taken the form of micro-credits.12 Secondly, there is the question of what objectives are being pursued by the opening up of credit as a policy, and whether or not they include the promotion of dynamics of innovation in the non-state sector, the creation of competition, and the consolidation of national private productive fabric, composed fundamentally of small entrepreneurs. The micro-credit is a specific variety of credit, oriented basically to supporting a proliferation of small businesses or to improving their infrastructure. Its most notable features include the small amounts of loans, no traditional guarantor requirement, types of interest that are relatively higher to cover the applicant’s risks, and the participation of specialised loan institutions.13 In Cuba’s case, the credits that are granted are for small amounts accompanied by high rates of interest and the most likely beneficiaries are small-scale businesses. Nevertheless, 11

The person, which may or may not be a relative of the credit applicant, who will cover the debtor’s contractual obligations in case the debtor fails to fulfil his or her obligation or pay his or her debt. 12 While the terminology of “micro-credit” is not part of the new legislation, the credit opening has been analysed from that perspective by economist Pavel Vidal. See http://www.ceec.uh.cu/sites/default/files/Pavel.pdf. 13 Traditional banking institutions generally do not promote the alternative of micro-credits, due to the high levels of risk associated.

there are other aspects that typify more conventional types of credits (the requirement of guarantors for the loan total and interest, granted by traditional banking institutions) and that restrict access by potential users. While it is logical that the credit opening should seek to promote the development of new, non-state forms, it includes restrictions that invalidate its contribution to the formation of new enterprises. First, it requires the applicant to provide collateral and “solidarity” guarantors, and secondly, the beneficiary must be a self-employed person or active farmer who can provide detailed information about the recent evolution of his or her business and a projection for the period covered by the loan. This restricts the granting of credits to established proprietors, marginalising those who are starting new businesses to precarious conditions and pushing them toward the use of internal sources of financing or access to informal moneylenders. However, it is not just new entrepreneurs or the smallest businesspeople that are being excluded from access to new sources of financing. While there is no upper limit on loans solicited, certain aspects make it unlikely for the more solid private businesses to apply for large loans. First, increasingly large amounts of credit can make the support of solidarity guarantors more complex. Secondly, there is the widespread phenomenon of understating profits to the tax authorities, which suggests discouragement, by subjecting a given business’s activity and income to the scrutiny of government institutions to determine its ability to honour commitments in the future. In addition, the way that it is currently formulated, the credit policy does not just explicitly favour established producers; it also creates barriers to the entry of new competitors in authorised non-state activities. In this way, restrictions that for years led to quasi-monopolistic conduct in certain sectors have been continued, at least partially. In terms of generating innovation, the credit policy oriented toward the non-state sector will only have indirect positive effects. Not including innovation in the regulatory framework relegates — consciously or unconsciously — the dynamics of innovation to incentives to which the entrepreneur is subject. While non-state property and management are generating forms of conduct that clearly maximise profit, the abovementioned context creates the conditions for distorting this, based on domineering practices that base the earnings quotas of producers on the constant exercise of their power over the market, and not on the introduction of new knowledge, practices or technology. In analysing the new credit policy for new forms of non-state production more than half a year since its implementation, the results do not seem to be very promising. While the banks had granted more than 47,000 loans worth more than 300 million

pesos by the close of the first semester, 90 percent of them were for financing home construction.14 With respect to the specific case of Banco Metropolitano, charged with promoting the new credit policy in the Cuban capital, by June 2012 it had granted just two loans (out of seven applications filed). Meanwhile, the Banco de Crédito y Comercio had granted three loans by March, contrary to what was expected, based on the positive reception in previous years for social credits to finance the energy savings programme and the large demand for loans to finance building materials. At the close of June, 100,830 self-employed workers were registered in the capital (representing approximately 25 percent of all self-employed workers in the country), according to the provincial office of the national tax administration (Oficina Nacional de la Administración Tributaria, ONAT). About 20 percent of these workers worked as employees of private businesses, which is why the potential number of credit applicants rose to 82,568, a figure that categorically demonstrates the new credit policy’s ineffectiveness and deficient reach to date. As long as self-employed workers and small farmers do not perceive these loans as a source of secure financing for the development of their activities, the policy will continue to be ineffective. Monetary authorities should take note of this and analyse in depth the causes for the low number of credit applicants and approvals. Apparently, the complexity associated with the process of applying for credits and the perception of difficult conditions for access are tending to reorient the demand for loans toward internal and informal sources, as mentioned above. One of the first is the accumulation of capital developed, through licit or illicit means, by a number of individuals who used privileged positions that they held during the period previous to the expansion of self-employment (and which they still hold, in many cases); and, as a common denominator among both sources, flows that come from abroad in the form of remittances or masked investment. Final comments The expansion of self-employment and the consequent opening of a significant number of businesses from 2010 to date have involved numerous investments with hardly any participation by Cuba’s banking institutions. The scarce experience that these institutions have in promoting credit services, resulting from their historically slight or non-existent relations with small entrepreneurs or private initiatives in general, is now their main handicap in fulfilling the role they have been given within the new economic model.

See A. Leyva: ob cit., 2012.

This poses a major challenge for the banking sector, which must immediately incorporate some of the practices used internationally to attract the attention of all of the non-state forms that are now interacting in the Cuban economy. A greater use of micro-finances and a reorientation of the current credit policy toward the use of micro-credits, based on the creation of specialised institutions, are some of the alternatives that can be explored to build closer relations with self-employed workers and small farmers. In this sense, a complementary action for expanding micro-credits could be an association between Cuban banks and international cooperation agencies with offices in the country, for the organised, efficient and flexible placement of funds that these agencies have in promoting the best non-state practices that are small scale but have a major impact on the domestic market. In addition, it would be necessary to study the large range of non-state forms of production to be able to establish a credit policy that is more differentiated to fit the applicant. Today, the policy is very homogenous and does not take into account the different characteristics of the new sector (smaller or larger businesses; ability to provide employment; established producers and those trying to enter the market; activities that are/are not knowledge-intensive; precarious or optimal conditions), beyond the narrow margin of interest rates that could be established by banks, bilaterally, depending on the investment risk. The internal heterogeneity of the non-state group and the homogeneity with which the policy has been conceived could determine that medium-size businesses that are already established will benefit. In this way, small entrepreneurs who are now entering (or wish to enter) the market will be excluded from the benefits of state credits, as will private producers whose businesses have the largest volumes of activity compared to others. If this context continues, it would be reasonable to think that levels of accumulation in the sector will be below what is needed. Improving the new credit policy in the transforming context of the economic model should be a top-priority task for the Cuban banking system, in the interest of strengthening its relations with the new forms of non-state production and promoting their expansion and development. The weaknesses of this new regulatory framework should be overcome so that Cubaâ&#x20AC;&#x2122;s banks recover vital spaces and become an organic agent with the â&#x20AC;&#x153;updatingâ&#x20AC;? process, so that the credit opening ensures the generation of dynamics of innovation within the non-state sector, the promotion of competition and the consolidation of the national private production fabric, composed fundamentally of small entrepreneurs. (2012)