How movable collateral gets credit moving
Transcript of How movable collateral gets credit moving
How movable collateral gets credit movingWorld Bank study for the first time confirms link between movable collateral registries and
access to finance in poor countries
According to economic theory, the introduction of movable collateral registries should increase firms’ access to finance by allowing them to leverage movable assets, such as inventory, crops and equipment, into capital for investment and growth. Nevertheless, so far this theoretical claim could not be backed up by empirical evidence – a gap World Bank researchers Inessa Love, María Soledad Martínez Pería and Sandeep Singh sought to fill with their recent paper “Collateral Registries for Movable Assets. Does Their Introduction Spur Firms’ Access to Bank Finance?” Their research leads them to answer this last question in the affirmative: they find, for example, that secured transactions reform in developing countries increases firms’ access to loans by 7%.
Loans with strings attached
The theoretical contributions their paper builds on can be traced back all the way to the landmark 1981 paper about credit rationing by Nobel laureate Joseph Stiglitz and Andrew Weiss. The literature springing from this article, mainly concerned with the developed world, talks
about how banks can reduce the risks associated with loans by requiring borrowers to put forward collateral. In practice, it turns out that 75% of all loans worldwide come with such strings attached.
The collateral conundrum in developing countries
When it comes to providing collateral, firms in developing countries face unique challenges, as there is a mismatch between the type of collateral that banks require and the type that companies have to offer. Where banks, cautious because of the often flimsy regulatory environment, ask companies to back up loans with fixed assets such as land or buildings, the bulk of the capital stock (almost 80%) of developing world firms is made up not of fixed but of movable assets. The solution to this collateral conundrum should logically lie not just in better “software”, namely laws and regulations, but also in better “hardware”, namely an official registry for movable collateral that specifies creditors’ priority by date and time of registration in the case of default on a loan.
Hard results about the “hardware”
There is widespread evidence for how the establishment of credit bureaus and registries unlocks extra financing for firms. Nevertheless, no such empirical backing exists for the intuition that the introduction of movable collateral registries should have the same effect – until now. Drawing on the World Bank’s Doing Business and Enterprise Surveys datasets, Love, Martínez Pería and Singh show that said registries increase access to bank finance in general by 8%. They arrived at this conclusion by looking at 7 countries (Bosnia, Croatia, Guatemala, Peru, Rwanda, Serbia and Ukraine) that recently introduced movable collateral registries and comparing them with three control groups, namely 59 countries that did not introduce such registries; 7 non-reform countries matched by location and income per capita to the 7 comprehensive reform countries; and 7 countries that did something
Table 1 Summary of the results of Love, Martinez Pería and Singh (2013).
about the “software” (secured transactions laws and registry regulations) but not the “hardware” (establishing collateral registries). The econometric analysis breaks down the positive impact of putting in place the registry and shows the following results:
• It improves access to finance in almost all of its different aspects: access to loans, working capital and fixed assets financed by banks and loan terms such as interest rates (3% lower) and maturity (6 months longer).
• Firms in countries that only worked on the software and stopped short of better hardware, did not experience the same degree of enhanced access to finance.
• Smaller firms (5-19 employees) and younger firms, usually more cash-strapped and credit-starved, benefit more from the registry than, respectively, larger firms and older firms.
Not all registries are created equal
Despite the statistically and economically solid results of the analysis, the paper suffers from an obvious limitation, as the authors themselves point out: the sample contains only 7 countries that introduced the movable collateral registry. This prevents the authors from probing deeper into the consequences of registry reform by considering how different types of movable collateral registries impact access to finance differently – an avenue of research that should open up in the future as more countries establish these registries and thus more data becomes available.
Variable Effect
Access to finance 8 percentage points
Access to loan 7 percentage points
% of working capital financed by banks
10 percentage points
% of fixed assetsfinanced by banks
20 percentage points
Interest rate 3 percentage points
Maturity 6 months
Contact: Alejandro Alvarez de la Campa Global Product Leader — Secured Transactions E-mail: [email protected] Phone: +1 202–458–0075; Web: www.ifc.org
Reference: Love, Inessa, Martinez Peria, Maria Soledad, Singh, Sandeep (2013). Collateral registries for movable assets: does their introduction spur firms' access to bank finance? World Bank Policy Research Working paper 6477.