Susana Lastarria-Cornhiel, Grenville Barnes (1995):
Assessment of the Praedial Property Registration System in Peru

VII. Credit Accessibility for Registered Properties

The most commonly recognized benefit from the titling and registration of land, besides the tenure security bestowed on the property owner, is the use of those secure ownership rights as collateral to solicit credit. Formal lending agencies, such as banks, often require that property being used as collateral not only be titled, but also that the title be registered. In fact, the rationalization for the cost of titling and registration programs is that they put capital into the hands of persons with little wealth and low incomes, leading to increased investment and productivity by these families. In general, however, there appears to be minimal credit accessibility for low-income families in Peru, whether rural or urban.

A. Formal Credit Accessabilitiy in Pueblo Jóvenes

Interviews with property owners in Pueblos Jóvenes, community leaders, and NGOs working with these urban communities confirmed that while families are anxious to acquire title to their land and generally agree to have these titles registered, their access to formal credit does not appear to increase significantly as a result of registration. Banks consider these properties of little value and any income-producing activities in these areas to be high-risk investments. In addition, since small loans are involved, the transaction costs are high. Since 1990, a total of 1,218 mortgages have been processed on 28,684 urban properties registered in the Registro Predial (see Graphs 2 & 5). This means that only 4.2% of those urban families who have registered their title documents in the Registro Predial have obtained mortgage credit.

One source of formal credit that was evident in the Pueblos Jóvenes is through the KARPA company. As mentioned previously, KARPA is a building supply company that sells basic construction materials (mostly bricks, cement, building rods, tiles, bathroom fixtures) on credit to families in Pueblos Jóvenes. The credit line is actually extended by ORION, a financing company that owns KARPA. When customers walk into a KARPA store and request credit for their purchase, KARPA employees assist them in filling out the forms. They then turn in the documentation to an ORION employee who has a desk in the store. Thus, both the purchase of materials and the credit line are done simultaneously.

In reality, the client signs two contracts: one with KARPA, and another with Orion. In addition, a mortgage is placed on the client's property. The loan is extended from Orion directly to KARPA, and the client pays Orion. The amount loaned is based on two factors: the value of the property, and the earning power of the property owner. Credit up to the value of the property is approved and the credit line can be renewed when most of the loan is repaid. KARPA clients usually have registered titles; if they do not have registered titles, they need a co-signer.

Loans are approved on the basis of one of three guarantees: a mortgageable property, a lien on a property (this requires a lawsuit to enforce), and a co-signer when property is not yet titled. The great majority of the credit loans are based on a mortgaged property. [FN 21] KARPA staff claim that there has been only 1% default on loans. If a client is late on his/her payments, an attempt is made to collect the payment, then a notarized letter is sent, and finally the matter is pursued through a law suit.

Our visit to a newly opened KARPA store revealed that in a one week period, 50 contracts had been drawn up and 10 credit lines had been approved for a total of US$10,000. Of these 10, 9 were guaranteed with mortgages and one by a co-signer. The monthly payments vary from US$34 to US$208. The loans are paid in 13 fixed payments (an initial payment subtracted from the loan amount at the time the loan is approved and 12 monthly payments) in US dollars over a one-year period.

Credit for building materials is sorely needed in the Pueblos Jóvenes (and the convenience of obtaining credit for and purchasing the materials in one place, open seven days a week, is surely appreciated); however, the cost of this credit is very high. A comparison of the financed cost of certain items offered at the KARPA store with prices at other building supply stores revealed that KARPA customers were paying approximately double the price. [FN 22]

While KARPA is one of the few institutions in Pueblos Jóvenes offering formal credit to property owners with registered title deeds, this credit is tied to consumer products and comes at a high price.