World Bank Group Making Finance Work for Africa: The Collateral Debate World Bank FPD Forum April 2007 Sevi Simavi Investment Policy Specialist FIAS, World Bank Group ssimavi@ifc.org
Outline Why care about collateral framework/ secured lending? What role does it play in the overall financial architecture? How to create an enabling environment for collateral framework / secured lending? Implementation challenges and lessons learned from reform projects
2004 2005 U.S. Asset Based Loans Outstanding ($billions) 450 400 350 300 250 200 150 100 50 0 2003 Year 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Source: Commercial Finance Association Annual Asset-Based Lending and Factoring Surveys, 2005
Movable Asset Lending in the Financial System Architecture The Firm Continuum Lowest Financial Strength Firms Highest Financial Strength Firms Unqualified Borrowers Funding Gap Zone Financed by Traditional Bank Loans or other sources Source: Udell, Asset Based Finance, Proven Disciplines for Prudent Lending
Movable Asset Lending in the Financial System Architecture Asset Based Lending Opaque Higher Risk Businesses Traditional Lending Opaque Lower Risk Businesses Saver/ Investors Securities Markets Transparent Businesses Source: Udell, Asset Based Finance, Proven Disciplines for Prudent Lending
Collateral benefits the most. Fast growing, under capitalized firms Addresses short term working capital financing needs Works well especially in informationally opaque environments Even in more traditional bank loans, collateral is often a condition precedent because provides greater assurance of recovery
Developing World: Collateral is a Major Constraint Composition of Assets Firms Hold 22% Land and real estate real estate Assets Accepted as Collateral 27% movable assets 78% Movable Assets 73% Land and real estate Source: World Bank Enterprise Surveys. Data taken from surveys conducted in over 60 countries, 2001-2005.
Solution: Modern collateral laws = more credit to private sector = better investment climate =1-2% additional GDP growth Private Credit to GDP CHE Access to loans- firm perceptions Private Credit to GDP PRT MYSHKG IRL PAN LBN DNK NZL NIC BOL AUT JOR NLD USA SGP BDI THA ISR GBR TGO KWT ARE URY HND HRV ESP MKD ETH DEU MDA ZAF MNG DOM MARSEN EGY HTI CHL GRC OMNCOG ZAR ZWE NPL SVNTWN SLE NER BEL KGZ AUS TCD MLI PNGNOR PRYMOZ LKA ITA AGO MDG ECU CRISAU GTM BEN BFA JAM SWE GEO ZMB KEN CAN LVA CIV FRA KOR CZE MWI ARM GIN AZE TUN CMR FIN KHM JPN HUN BGR YEM SYR GHAPER BIH IRNPAK SLVLTU VNM PHL UKRNGA ALB KAZ POL UGA TZA BGD BLRCOL BWA VEN DZA ROM BRA ARG IND IDN TUK RUS MEX -4-2 0 2 4 Collateral Index SVK 6 Access to loans - 4 HR V BR EG ACH Y GR L TUC HT K I NI C VE ME N X UR AR Y G - 2 DO LK M A ES AU P ITT CH RU PO A N PR DZ SL AG CR AY O BOI L LT IN SL U D TH VFR A PA SV MO MA N ZR PA K EC SE U CZ NE JP N DN K NA M YU ID G ZW NNO KO IS ER PE R MD RGT HU GM NCH BG E D MK D FI N SW TU UGN TW E TZ AN GH BE MW CO A RO L PR I M PH LT ML ETL DE HI VN JAU M CM HN R D ZA F BW JO A MY RUS BGS A R UK ZM R B AU NZ LV S NL HK L A DG CA NG N A TC KE D N 0 2 4 Collateral Index GB IR R L SG P SV K Source: Doing Business in 2005
Four Key Policy Principles Legal Framework: Allow Broad Scope of Movable Assets as Collateral Provide Clear Priority Rules Institutional Framework: Have a Centralized Registry Provide For Speedy, Inexpensive Enforcement
Four Key Policy Principles PILLAR I: Broad Scope of Movable Assets As Collateral Unlock the Dead Capital Any movable asset with economic value can be used as collateral Minimum formal requirements and low costs to create security interests Use of non possesory security interests should be allowed Freedom of contract should be embraced
Four Key Policy Principles PILLAR II: Clear Priority Rules Ensure Predictability in Commercial Transactions Allow the creditor to determine its right vis a vis other creditors
Four Key Policy Principles PILLAR III: Publicity through collateral registries Transparency Information sharing Notifies third parties and potential creditors of the existence of a security interest Should be centralized, electronic, fast, accurate and inexpensive
Four Key Policy Principles PILLAR IV: Enforcement Repossessing the collateral and selling it to satisfy the claims Speedy, effective and inexpensive enforcement mechanisms Out of court or summary proceedings
Implementation Challenges At the Design Stage Lack of understanding of the reform benefits, opposition from various groups Seize the opportunity: Use external factors to build momentum (WTO, EU accession, improving the DB indicators etc)
Implementation Challenges During the Reform Process Legal and institutional reforms are complex and time consuming, handholding is often required throughout the process Vested interests of various stakeholders requires careful planning and management
Implementation Challenges After the Reform Enactment of a law is merely a beginning, adequate implementation determines the impact Capacity building for financial sector, private sector and the legal community is critical so that the laws do not remain in the books Monitoring and evaluation