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Home , Credit bureau

16TH EDITION

Training for Reform Getting

Nadine Abi Chakra Edgar Chavez Position Department Development Economics │Global Indicators February 5, 2019 How is the ranking on Getting Credit constructed? Based on strength of legal rights and depth of credit information

 Do lenders have credit information on Getting Credit: entrepreneurs seeking credit? collateral rules and credit information  Is the law favorable to borrowers and lenders using movable assets as collateral?

1 What do the Getting Credit indicators measure?

Strength of Legal Rights index (0–12)

Protection of rights of borrowers and lenders through collateral laws

Protection of secured creditors’ rights through laws

Depth of Credit Information index (0–8))

Scope and accessibility of credit information distributed by public credit registries and private credit bureaus

Public credit registry coverage (% of adults)

Number of individuals and firms listed in a public credit registry as % of adult population

Private credit bureau coverage (% of adults)

Number of individuals and firms listed in largest private credit bureau as % of adult population

2 LEGAL RIGHTS INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices

Development Economics │Global Indicators Why does Legal Rights matter? From the small and medium-size enterprises’ & the lenders’ perspective

• Affordable credit.

• Collateral. Small and medium-size • Immovable property: Most SMEs do not own real estate. enterprises • Movable property: In developing countries movable property is not accepted as collateral due to a lack of legal framework.

• The lender’s cost of capital, transaction costs to make the , and risks the loan will not be repaid.

• Impact: smaller availability, shorter at higher Lenders rates.

• If creditors have priority over other creditors or more bargaining power to force repayment or take control of the firm, they will extend credit on more favorable terms.

4 LEGAL RIGHTS INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices What is measured by Legal Rights? Secured transactions system & non-possessory security interest (NPSI)

Functional Creation Publicity Enforcement approach

Single law or same Parties to a security Priority rules Third party principles apply for agreement outside/inside effectiveness all security bankruptcy and their functional Types of movable equivalents property that can be Secured creditors used as collateral Recommended protection during approach: reorganization or Types of obligations registration bankruptcy that can be secured procedures with collateral Registration in one collateral registry Unified, notice Out of court Description based and modern enforcement requirements of the collateral registry collateral

6 What is not covered by Legal Rights?

No immovable property

No specialized assets X (aircrafts, ships, bonds, shares, IP rights)

No non-mandatory legal provisions Contractual liberty is considered a given by Doing Business. The law is the standard

7 LEGAL RIGHTS INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices

Development Economics │Global Indicators Top performers in 2017/18 Getting Credit – Legal Rights

31 economies obtain all three points on the questions relevant to collateral registries

Montenegro Afghanistan Micronesia, Fed. Sts. Mongolia Montenegro Brunei Darussalam Bosnia and Herzegovina Nepal Brunei Darussalam New Zealand Puerto Rico Cambodia Palau Colombia Papua New Guinea Australia Puerto Rico (U.S.) Samoa Solomon Islands Kosovo Tonga Lao PDR Uzbekistan Vanuatu Liberia Vanuatu Zambia Malawi West Bank and Gaza Marshall Islands Zambia

9 Who reformed in Getting Credit – Legal Rights in 2017/18?

Feature Economies Some highlights Created a unified and/or modern Azerbaijan; Belgium; ; established a modern and collateral registry for movable ; United Arab unified collateral registry. property Emirates

Introduced a functional and Azerbaijan; Kenya Kenya strengthened access to credit by implementing secured transaction system a functional secured transactions system. The new law regulates functional equivalents to loans secured with movable property, such as financial leases and fiduciary transfer of title.

Allowed for general description of Djibouti Djibouti allowed the general description of and assets that can be used as obligations. collateral Expanded range of movable assets Azerbaijan; Belgium; Djibouti; Egypt, Arab Rep. introduced a new law that broadens that can be used as collateral Egypt, Arab Rep.; ; the scope of assets which can be used as collateral United Arab Emirates to secure a loan.

Granted absolute priority to Afghanistan; Belgium; Djibouti; Afghanistan introduced a new law that grants secured secured creditors or allowed out- Egypt, Arab. Rep.; ; Sudan; creditors absolute priority over other claims within of-court enforcement Turkey; United Arab Emirates insolvency proceedings.

Granted exemptions to secured Azerbaijan; ; Sudan Rwanda adopted a new law on insolvency that creditors from automatic stay in contemplates protections for secured creditors insolvency proceedings during an automatic stay in reorganization proceedings.

10 12 economies implemented reforms on the strength of legal rights index in 2017/2018

Reformers in strength of legal rights (0-12)

12 11 10 10 10 10 9 9 8 8 8 8 7 7 6 6 5 5 5 4 4 4 3 2 2 2 2 2 1 1

0

2017/18 2016/17

Source: Doing Business database. 11 LEGAL RIGHTS INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices

Development Economics │Global Indicators Legal Rights Good practices

Global good practices

 Establishing a functional approach to secured transactions

 Allowing a general description of collateral

 Maintaining a unified registry

 Protecting secured creditors’ rights during an automatic stay when a debtor enters a court-supervised reorganization procedure

 Allowing out-of-court-enforcement

13 Examples of good practices in all regions

Practices Economies Examples Establishing a functional approach to secured transactions and having a notice- Australia; ; ; Palau; 41 based registry where they can be Vietnam; Kosovo; Mexico; Tonga registered

Allowing a security right in a single Gabon; ; India; ; Rwanda; 112 category of assets Kenya; ; Vanuatu

Jamaica; Lao PDR; Cambodia; Bosnia and Maintaining a modern and online 51 Herzegovina; Honduras; SAR, collateral registry China; Nepal

Protecting secured creditors’ rights during Azerbaijan; Finland; Greece; ; automatic stay when a debtor enters a 28 Moldova; ; Thailand, United States court-supervised reorganization procedure

Armenia; China; Egypt, Arab Rep; ; Granting priority to secured creditors 59 Montenegro; New Zealand; Estonia; outside and inside of bankruptcy

14 CREDIT INFORMATION INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices Why does credit reporting matter?

• Borrowers know their financial abilities and investment opportunities better than lenders do. The inability of lenders to accurately assess the creditworthiness of borrowers contributes to higher default rates and smaller loan portfolios. Reduced information • Credit reporting systems offer one way to minimize the problems of asymmetries asymmetric information since past behavior is considered a reliable predictor of future behavior. A good —sometimes referred to as reputational collateral—minimizes the perception of risk and can enable an individual or firm to gain access to financing.

• Lenders are also more likely to lend to larger firms, which may be more transparent as a result of more elaborate legal and accounting rules and Greater access regular publication of certified auditors' reports on financial transactions. to credit for small firms • With better, cheaper and faster access to credit information, lending officers can use accurate and objective data to make unbiased decisions in offering loans. And when they can assess the risk of default, banks have more incentive to lend to individuals and small firms.

16 Why does credit reporting matter?

• When lenders are known to share information about customers’ credit Better borrower records, borrowers know that defaults on loans from one lender may discipline disrupt future access to credit from all other lenders. So borrowers have greater incentive to repay.

• Regulators often use information from credit bureaus and credit registries Support for bank to assess whether current provisioning is adequate and to analyze supervision and credit developments in credit markets and interest rates. The results may risk monitoring guide changes in the legislation governing financial institutions. • As more credit information becomes available, competition among banks and nonbank financial institutions should increase.

17 CREDIT INFORMATION INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices What does the Depth of Credit Information index measure?

• The depth of credit information index measures rules and practices affecting the coverage, scope and accessibility of credit information available through either a credit bureau or credit registry.

• A score of 1 is assigned for each of the following 8 features of the credit bureau or credit registry (or both):

Who is 1. Data on both firms and individuals are covered. covered? 2. Data on loan amounts below 1% of income per capita are covered.

3. Both positive credit information (e.g. original loan amounts, outstanding loan amounts and a pattern of on-time repayments) and negative information (e.g. late payments and the number and amount of defaults) are reported. Type of credit 4. Data from retailers or utility companies are reported in addition to data from information? financial institutions. 5. At least 2 years of historical data are reported. Credit bureaus and registries that erase data on defaults as soon as they are repaid or report negative information more than 10 years after defaults are repaid receive a score of 0 for this component.

19 What does the Depth of Credit Information index measure?

6. By law, borrowers have the right to access their data in the largest credit bureau or registry in the economy. Credit bureaus and registries that charge more than 1% of income per capita for borrowers to inspect their data obtain a Additional score of 0 for this component. features 7. Banks and financial institutions have online access to the credit information (through a web interface, system-to-system connection or both). 8. Bureau or registry credit scores are offered as a value added service to help financial institutions assess the creditworthiness of borrowers.

Credit bureau and credit registry coverage: • The coverage reports the number of individuals and firms listed in a credit bureau or credit registry’s database as of January 1, 2018, with information on their borrowing history from the past 5 years + the number of individuals and firms that have had no borrowing history in the past 5 years but for which a lender requested a credit report from the bureau or registry in the period between January 2, 2017 and January 1, 2018.

• The number is expressed as a percentage of the adult population (the population age 15 to 64 in 2017 according to the World Bank’s World Development Indicators).

• If the credit bureau or credit registry covers less than 5% of the adult population, the score on the depth of credit information index is 0. 20 CREDIT INFORMATION INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices 42 economies score 8 out of 8 on the depth of credit information index in 2017/18

Argentina

Armenia Honduras Peru

Azerbaijan

Bahrain , Islamic Rep. Rwanda

Brazil Jamaica

Darussalam Kenya , China

Canada Korea, Rep.

China Latvia Turkey

Cote d’Ivoire United Arab Emirates

Dominican Republic United Kingdom

Ecuador Mexico United States

Egypt, Arab Rep. New Zealand Uruguay

Georgia Nicaragua West Bank and Gaza

Guyana Zambia 22 Source: Doing Business 2019. 19 economies implemented reforms improving their credit information systems in 2017/18

Feature Economies Some highlights Established a new Azerbaijan; ; Haiti; Ireland; San Marino improved access to credit information by launching credit bureau or San Marino a new credit registry. registry

Improved regulatory Antigua and Barbuda; The Madagascar improved access to credit information by adopting framework for credit Bahamas; Grenada; Madagascar a law that creates a new credit information system. reporting

Expanded scope of Brazil; Cote d’Ivoire; ; In Cote d’Ivoire four utility companies began submitting information collected Jamaica; Turkey; Indonesia positive and negative information on consumer accounts to and reported by credit the credit bureau. bureau or registry

Introduced bureau or Brunei Darussalam; Zimbabwe In Brunei Darussalam, the credit registry began offering credit registry credit scores scores to banks and other financial institutions to better inform as a value-added their lending decisions. service

Guaranteed by law Qatar, Mauritania Qatar adopted the Consumer Credit Act 2016 guaranteeing borrowers’ right to borrowers’ right to inspect their own data. inspect data

23 Source: Doing Business 2019. The number of operational, active credit bureaus and registries has increased in the recent years

130 125 120

110 105 100

90

80

70 66

60 56 50

40

Number of credit bureaus measured by DB Number of credit registries measured by DB

24 Source: Doing Business database. CREDIT INFORMATION INDEX

I. Why does it matter? II. What does it measure – and what does it not? III. What are the main findings in DB19? IV. Good practices Good practices in credit reporting and share of economies with them in 2017/18

Practices Economies Examples

Reporting positive as well as Azerbaijan; Brazil; Cote d’Ivoire; China; 116 negative data Greece; Ireland;

Collecting and distributing data ; Belgium; Estonia; Trinidad and from retailers and utility 79 Tobago; Madagascar; West Bank and companies Gaza

Lowering or eliminating minimum Albania; ; Cabo Verde; Equatorial loan thresholds 136 Guinea; Seychelles; Zambia

Guaranteeing by law borrowers’ ; India; Jamaica; Mauritania; 125 right to inspect data ; Nicaragua

Offering bureau or registry credit Brunei Darussalam; Canada; ; 91 scores as a value added service Nigeria; United Arab Emirates; Qatar

26 Source: Doing Business 2019. THANK YOU!

www.doingbusiness.org

Doing Business Development Economics │Global Indicators