16TH EDITION Training for Reform Getting Credit 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 bankruptcy 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 loan, and risks the loan will not be repaid. • Impact: smaller availability, shorter loans at higher interest 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 interests 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 Colombia questions relevant to collateral registries Montenegro Afghanistan Micronesia, Fed. Sts. Australia Mongolia New Zealand Azerbaijan Montenegro Brunei Darussalam Bosnia and Herzegovina Nepal Brunei Darussalam New Zealand Puerto Rico Cambodia Palau Colombia Papua New Guinea Australia Costa Rica Puerto Rico (U.S.) El Salvador Samoa United States Honduras Solomon Islands Kosovo Jamaica Tonga Lao PDR Uzbekistan Vanuatu Liberia Vanuatu Zambia Malawi West Bank and Gaza Marshall Islands Zambia Mexico 9 Who reformed in Getting Credit – Legal Rights in 2017/18? Feature Economies Some highlights Created a unified and/or modern Azerbaijan; Belgium; Kenya; United Arab Emirates established a modern and collateral registry for movable Nicaragua; 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 debts 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.; Turkey; 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.; India; Sudan; creditors absolute priority over other claims within of-court enforcement Turkey; United Arab Emirates insolvency proceedings. Granted exemptions to secured Azerbaijan; Rwanda; 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; Guatemala; Peru; Palau; 41 based registry where they can be Vietnam; Kosovo; Mexico; Tonga registered Allowing a security right in a single Gabon; Canada; India; Romania; Rwanda; 112 category of assets Kenya; United Kingdom; Vanuatu Jamaica; Lao PDR; Cambodia; Bosnia and Maintaining a modern and online 51 Herzegovina; Honduras; Hong Kong SAR, collateral registry China; Nepal Protecting secured creditors’ rights during Azerbaijan; Finland; Greece; Latvia; automatic stay when a debtor enters a 28 Moldova; Brazil; Thailand, United States court-supervised reorganization procedure Armenia; China; Egypt, Arab Rep; Japan; Granting priority to secured creditors 59 Montenegro; New Zealand; Estonia; outside and inside of bankruptcy Namibia 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 credit history—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