Although NAFTA opens Mexico's financial services sector to U.S. and Canadian lenders, it has not remedied Mexico's antiquated system of commercial and consumer secured lending. Unlike its northern neighbors, Mexico has not adopted far-reaching legislative changes similar to those found in Article 9 of the Uniform Commercial Code and in the Personal Property Security Act (PPSA), effective in most Canadian provinces.
Like most of Latin America, Mexican law in this area was originally designed to meet the needs of an agrarian economy and has changed relatively little since the early part of this century. Real estate is the favored collateral and, with few exceptions, the Mexican legal system is highly suspicious of and even antagonistic toward personal property security, particularly when left in the debtor's possession.
Among the shortcomings in Mexican law are:
As a result, several U.S. and Canadian asset-based lenders are reassessing their strategy with respect to the Mexican market. While NAFTA technically opens the door, the domestic legal system effectively prevents these lenders from doing business in Mexico by failing to provide several key features that go to the core of asset-based lending anywhere in the world.
The revelation of these problems is perhaps a silver lining in Mexico's recent financial cloud. While Mexico has attracted significant foreign capital in the last few years, very little of it was directed to productive assets. Instead, it went to high- yield bonds and other speculative investments which did little to develop the economy and was immediately pulled out of the country at the first sign of trouble. The Mexican government, with World Bank and IMF encouragement, is now taking the legislative steps necessary to attract investment, both foreign and domestic, in plant and equipment and other forms of patient capital needed to create jobs and put the economy on the path to steady growth.
As an expert in Latin American credit, Dr. Boris Kozolchyk, the founder of the National Law Center for Inter-American Free Trade, has been promoting the need for legislative modernization in this area for many years. Consequently, soon after establishing the Center, Dr. Kozolchyk initiated the Secured Financing Project in order to complete a thorough investigation of all aspects of law and practice relating to personal property secured financing in Mexico with a view toward assisting the Mexican government with law reform efforts.
The Center's work is consistent with similar projects currently underway in other Latin American countries under the direction of The World Bank, and in several Eastern European countries under the auspices of the European Bank for Reconstruction and Development (EBRD).
The Center's project is being coordinated by Prof. Ronald C.C. Cuming of the University of Saskatchewan College of Law who was the chief architect of the PPSA and is now an advisor to the EBRD, the European Community, The World Bank and the United Nations. Prof. Alejandro Garro of the Columbia School of Law is also a key member of the project team. Prof. Garro, a native of Argentina, has published a number of articles on the desirability of legislative reform in Latin America using Article 9 as a model. Prof. Garro is also helping to guide The World Bank's reform efforts in other Latin American countries.
Recognizing the need for change, and in view of the Mexican government's desire to reform the current system, several key representatives from Mexico's private sector agreed to assist the National Law Center in the completion of its study which will culminate with a report containing specific recommendations for legislative and registry reform in Mexico. The Mexican participants include the National Association of Mexican Notaries, the Mexican Bankers Association, the Counsel to the Private Business Sector and representatives from key Public Registries of Commerce and Property. Shortly thereafter it is expected that the project will move to its second stage involving the drafting of specific legislative changes.
An over-arching consideration in this process is the rapid development of electronic registry systems in the United States. In Canada, financing statements may be filed and searched electronically via a personal computer/modem link. Efforts are well underway in the United States toward replacing Article 9's paper-based system with electronic filing. It is widely agreed that any reform efforts in Mexico should adopt state-of-the-art electronic filing as well. As a result, at the conclusion of this process it will be possible to file and search for security interests in all three NAFTA countries from any location in the world where a modem line can be found.
To this end, in March, 1995 the Center hosted a conference in Mexico during which registrars from throughout the country met with and listened to presentations by Canadian and U.S. registrars concerning electronic filing systems. In addition, the Mexican registrars were invited to join the International Association of Corporate Administrators, the professional association for secured transaction record systems for the United States, Canada and Great Britain which is also intimately involved in the implementation of electronic filing in the United States.