Download The Irresistible Case for Moveable Collateral

IFC
The Irresistible Case
for Moveable Collateral
International
Finance Corporation
World Bank Group
Collateral facilitates credit by reducing the potential loss lenders face from non payment of a loan and by signaling the quality of a potential borrower. Although
fixed collateral (land and buildings) are widely accepted as loan guarantees in
developing countries, moveable collateral (equipment, livestock, inventories,
etc.) are not. As a result, billions of dollars in assets cannot be leveraged for
credit and business expansion, reducing growth prospects and especially hurting
small and micro enterprises which lack fixed collateral.
Many countries have recognized the importance of moveable collateral and have initiated reforms in this area. These
include creating an appropriate legal and regulatory framework and establishing an efficient registry system f or
pledged assets. An effective regime for moveable collateral should follow these three principles1,2:
(1) Creation of security interests is open – anyone can take a security interest in any asset for any
transaction.
(2) Perfection of security interests - Priority of claims is unambiguous and takes precedence over
other laws and there is public access to the registry so lenders can easily check if an asset is
already pledged.
(3) Effective enforcement so lenders can efficiently take possession and dispose of asset(s) if loan
defaults.
Expanding use of moveable collateral but far short of potential
 As of 2008 there are more than 70 countries with a unified registry system for all security rights in moveable property.3
 World Bank Enterprise Surveys (2001-2005) covering firms in more than 60 low and middle-income countries indicated that
44% of corporate assets were in machinery compared with 22% of assets in land and buildings. Banks, however, reported
that 73% of secured transactions were guaranteed by fixed assets – land and buildings – pointing out a clear mismatch
between assets available to firms and what is considered a valued guarantee in credit markets. 4
 In China, for example, 50% of SME assets are moveables – inventories and receivables – but only 4% of commercial loans
are guaranteed solely by moveable assets. Not surprisingly, 98% of Chinese banks surveyed on this topic were in favor of
collateral reform. 5
 By comparison, in the United States, a majority of asset-backed small business loans in the U.S. are secured with moveable
assets – one study estimates 67% - with accounts receivables and inventories accounting for two-thirds of the amount. 6
Overall, 80% of U.S. small business loans are secured by fixed or moveable collateral and when taking into account the value
of all commercial and industrial loans the figure is above 50%. 7
Impact of moveable collateral
There is an expanding evidence base on the importance of collateral in credit markets, including recent work on impact of
collateral reforms in developing countries. In many instances the research analyzes the overall importance of secured lending
and does not distinguish between fixed and moveable collateral. A few studies, however, do look at the impact of moveable
collateral on lending markets. Impact findings both from studies focused solely on moveable assets, and from those analyzing
moveable and fixed collateral, are presented below.
 In a study of bank loans made to firms in 12 Eastern European countries between 1994 and 2002, moveable collateral laws
were significantly correlated with increased bank lending and the impact was particularly strong if the country was highly
ranked in terms of creditor rights. 8
 Slovakia reformed their secured transactions law in 2002 so that moveable collateral could be used as loan guarantees. Now
more than 70% of new loans to business are backed by moveable assets and receivables and credit to the private sector is up
by 10%.6
 In Romania in the five years after secured transactions reform the number of annual filings increased from only 95 in 2000 to
359,000 in 2005. While some of these were related to the 73,000 borrowers in the formal financial system, many more were
obtaining credit from non-bank lenders who further opened access to finance – especially for small firms. 2,9
 In countries where security interests are perfected and the creditor has absolute priority in cases of loan default, credit t o the
private sector as a percentage of GDP averages 60% compared with only 30 to 32% on average for countries without these
creditor protections.4
 In industrial countries, borrowers with collateral get nine times the level of credit given their cash flow compared to
borrowers without collateral. They also benefit from longer repayment periods (11 times longer) and significantly low er
interest rates (50% lower). 2
 Research on financing patterns of Spanish SMEs showed that firms pledging collateral had better access to long -term bank
loans and that young firms (which lacked credit histories) used collateral pledges to signal their quality.10,11
Moveable collateral contributes to sound financial systems
Moveable collateral reforms strengthen financial systems in a variety of ways:
 Diversification of assets held by financial institutions so they can more efficiently spread risks;
 Reducing concentration in the financial system, by providing banks with profitable lending opportunities in the SME sector (s o
they can expand their activities beyond corporates);
 Improved liquidity of assets, especially short-term assets such as accounts receivables, inventories and livestock;
 Increased competition for financial services by enabling both banks and non-banks to offer secured loans;
 Creates opportunities for securitizing loan portfolios in secondary markets, which expands acces s to capital; and
 Improved ability of regulators to analyze portfolio risks in line with both standardized approach and internal risk rating mo dels.
Moveable Collateral and the World Bank Group
The World Bank Group has been instrumental in achieving secured transaction reforms in __ countries over the past 15 years.
Staff from the World Bank, FIAS and IFC collaborate with partners in client countries and the international development
community to promote these vital reforms via both investment operations and advisory services. More information is available
through this site:
http://www.worldbank/xxxx
Bibliography
Fleisig, Heywood, 1996. “Secured Transactions: The Power of Collateral.” Finance and Development, June 1996.
Chaves, Rodrigo, Nuria de la Pena and Heywood Fleisig, 2004. “Secured Transactions Reform: Early Results from Romania.”
CEAL Issues Brief, Center for Economic Analysis of Law, September 2004.
3 “Getting Credit” in Doing Business 2008. World Bank. Website: http//www.doingbusiness.org/gettingcredit/
4 Safavian, Mehnaz, Heywood Fleisig and Jevgenijs Steinbuks, 2006. “Unlocking Dead Capital: How Reforming Collateral Laws
Improves Access to Finance.” Private Sector Development Viewpoint, No. 307, World Bank, March 2006.
5 “Secured Transactions Reform and Credit Market Development in China”, 2006. World Bank – People’s Bank of China
publication.
6 “Vietnam: Increasing Access to Credit Through Collateral (Secured Transactions) Reform”, 2007. IFC / MPDF / FIAS.
7 Leitner, Yaron, 2006. “Using Collateral to Secure Loans.” Philadelphia Federal Reserve Business Review, Q2, 2006.
8 Haselmann, Rainer F., Katharina Pistor and Vikrant Vig, 2005. “Bankruptcy Legislation and Banking Behavior: Evidence from
Transition Economies.” American Law and Economics Association Annual Meetings, 2005, Paper 3.
9 Lupulescu,Diana, 2006. “Romania: The Electronic Archive of Secured Transactions.” Presentation to the Body of Operators of
Electronic Archives of Secured Transactions, London, June 8-9, 2006.
10 Gonzalez, Raquel Lago, Jose A. Lopez and Jesus Saurina, 2007. “Determinants of Access to External Finance: Evidence from
Spanish Firms.” Working Paper 2007-22, Federal Reserve Bank of San Francisco, September 2007.
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2
Jimenez, Gabriel, Vicente Salas and Jesus Saurina, 2006. “Determinants of Collateral.” Journal of Financial
Economics, Vol. 81, 2006.
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Resources
Manager, FIAS
Thomas Davenport
(202) 473-5418
[email protected]
Manager, Financial Infrastructure and
Institution Building
Peer Stein
(202) 473-5418
[email protected]
Program Director, Moveable Collateral
Sevi Simavi
(202) 473-7552
[email protected]