Sharing Ideas for Effective Policies, Jakarta, Indoneisa – October 15-16,2014

Elaine MacEachern WBG,Global Product Specialist

Secured Transactions and Collateral Registries: A Global Perspective

Access to Finance, World Bank Group

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

1. Why WBG/IFC’s Focus

on Secured Transactions?: Clear Market

Failure in East Asia Pacific

3

1. Why is IFC Focusing in this

Area?: Clear Market Failure

SME FINANCE GAP

400 million SMEs in developing world

50% unserved or underserved

14% with loan or line of credit

COLLATERAL GAP

Source: World Bank Enterprise Surveys

Mismatch between assets owned by companies and collateral required

44%

34%

22%

Vehicles/machinery/equipment

Accounts Receivable

Land / Real Estate

73%

27%

Land / Real Estate Movable property

Capital Stock of Firms Collateral Taken by FIs

Current EAP Context

5

SNAPSHOT OF SECURED TRANSACTIONS AND ACCESS TO CREDIT IN BOTH REGIONS

Only one of the MENA countries (Afghanistan) has a modern secured transactions law. The rest, very fragmented legal frameworks with provisions in many laws. Only one (Afghanistan) of the MENA countries has modernized its collateral registry. Palestine is launching one as well.

In Sub-Saharan Africa, only two countries (Ghana and Liberia) have developed modern registries and four countries have reformed the laws in line with international accepted standards (Ghana, Malawi, Rwanda and Liberia)

Regional Economy

Percent of firms identifying

access to finance as a major constraint

Percent of firms with a bank loan/line of

credit

Proportion of loans requiring collateral (%)

Value of collateral

needed for a loan (% of the loan amount)

Percent of firms whose recent

loan application was rejected

Percent of firms using banks to

finance investments

East Asia & Pacific 17.1 35 78.3 197.5 9.2 22.1Eastern Europe & Central Asia 16.8 36.7 82.2 210.1 8.7 26.1High income: OECD 13.9 51.6 65.1 151.1 5.6 37.2Latin America & Caribbean 31.1 45.8 72.1 204.1 ... 32.7Middle East & North Africa 38.5 20.4 76.5 182.5 10.3 23.5South Asia 33.4 34.8 84.3 278.1 16.3 29.4Sub-Saharan Africa 41.7 23.6 79.3 174.6 13.3 18.2Source: World Bank Enterprise Surveys

Source: World Bank Doing Business 2014

RANKING ON GETTING CREDIT INDICATORS

Borrowers and Creditors Right Index (0-10)

OECD 7

Europe &Central Asia 7

East Asia & Pacific 7

Latin America & Caribbean

6

South Asia 6

Sub-Saharan Africa 6

Middle East & North Africa

3

5.9

7.7

9.9

19.7

33.4

37.5

66.7

3.5

0.6

1.7

9.6

6.6

31.2

59

0 10 20 30 40 50 60 70 80

Sub-Saharan Africa

South Asia

Middle East & North Africa

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

OECD

Percent of Adults

Average Bureau Coverage (% of adults)

2005

2014

WHY ARE FINANCIAL INSTITUTIONS NOT WILLING TO TAKE MOVABLE PROPERTY AS COLLATERAL?

Restrictions on types of assets

Lack of clear creditor priority

Enforcement issues

Lack adequate legal framework

Lack registry of security interests in

movables

Dysfunctional Registry/ No Registry Lack of publicity No transparency

No experience with this type of financing

Do not have staff with necessary skills

Lack know how on movable asset

lending

Not their type of business

No competition in the lending markets

Revenue from other sources (TB)

Lack interest

2. Potential Impact of Secured

Transactions Reforms in Access

to Credit

•BENEFITS OF A SOLID SECURED TRANSACTIONS SYSTEM

• PROMOTES CREDIT DIVERSIFICATION

• INCREASES MARKET COMPETITION

• REDUCES THE COST

OF CREDIT

• INCREASES ACCESS TO CREDIT REDUCING THE RISK OF CREDIT - Underserved

MSMEs and women entrepreneurs - Promotes risk management, prudent lending

- - Better interest rates - Move from informal to formal financing - Cost savings for businesses

- Credit risk diversification: immovable and movable - Sector diversification in the portfolio

- Development of industries (factoring and leasing) - NBFIs

BENEFITS OF A SOLID SECURED TRANSACTIONS SYSTEM

10

Variable Effect

Access to finance 8 percentage points

Access to a loan 7 percentage points

% of working capital financed by banks

10 percentage points

Interest rates 3 percentage points

Loan maturity 6 months

11

Study also provides evidence that the impact of the introduction of movable registries on firms’ access to finance is larger among smaller firms, who also report a reduction in subjective, perception-based measure of finance obstacles.

Collateral Registries for Movable Assets: Does their Introduction Spur Firms’ Access to Finance?

by Inessa Love, Sole Martínez Pería and Sandeep Singh

3. IFC’s Secured Transactions

Programs: Business and

Delivery Model

Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumer credit

Bank Accounts Inventory and raw goods

Vehicles Industrial and agricultural

equipment Durable consumer

goods Agricultural products (crops,

livestock, fish farm)

Intellectual Property rights

Accounts receivable

SECURED TRANSACTIONS SYSTEMS

• BUILDING THE CAPACITY OF

STAKEHOLDERS

• MONITORING IMPACT & COMMUNICATIONS

• CREATION OF ELECTRONIC REGISTRY

• LEGAL AND REGULATORY FRAMEWORK

1. Create Committee 2. Draft new STCR Law 3. Raise awareness 4. Submit Law to Parliament 5. Draft regulations 6. Revise Central Bank regulations

1. Support drafting of technical specifications 2. Support procurement process 3. Support operation of the registry 4.Training/awareness

1. Training and awareness raising stakeholders (public & private stakeholders), including law and registry 2. Technical training to industry players

1. Develop M&E plan including baseline information 2. Conduct periodic monitoring of impact through registry indicators & surveys 3. Independent evaluations 4. Communications

1 2

4 3

BUSINESS AND DELIVERY MODEL – HOLISTIC APPROACH

PRINCIPLES FOR AN EFFECTIVE SECURED TRANSACTIONS SYSTEM

15

Effective Secured

Transactions System

Broad scope

Creation

Publicity / registration Priority

Enforcement

Stand Alone ST Law and harmonization with other laws (insolvency, leasing, etc)

Functional Approach

Registry Regulations

CENTRAL BANK REGULATIONS ON COLLATERAL ELIGIBILITY AND PROVISIONING ARE KEY

16

BASEL II: COLLATERAL RISK MANAGEMENT THE STANDARDIZED APPROACH

THE INTERNAL RATINGS-BASED APPROACH

DEFINITION OF A COLLATERALIZED TRANSACTION

A collateralized transaction is one in which banks have a credit exposure or potential credit exposure; and that credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty or by a third party on behalf of the counterparty.(Rule 119)

In addition, eligible financial collateral is an instrument that allows banks to reduce their credit exposure to a counterparty and their capital requirements due to the risk mitigation effect of the collateral. (Rule 120)

CENTRAL BANK REGULATIONS ON COLLATERAL ELIGIBILITY AND PROVISIONING ARE KEY

17

COLLATERAL ELIGIBILITY Methods Eligible Collateral Standardized Approach

Cash, Gold, and Certain eligible marketable securities.

IRB Approach

Cash, Gold, and Certain eligible marketable securities.

Receivables and Real Estate

Other Eligible Movable Collateral (inventory, equipment, etc.)

LEGAL STANDARDS REQUIRED

All documentation is binding to the parties (creation of security interests)

Collateral is legally enforceable: lenders may take legal possession and may enforce its security right out of court

Collateral must be perfected (possession or registration), therefore, a collateral registry must be in place

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Single data source for all collateral, all debtors, centralized registry

Web based system accessible 24/7

Notice based system, limited information, no documents

Registrations done by creditors or their representatives

Information available to the public in general for searches

Flat reasonable registration fees to cover the cost of the operation, non cash payments

Limited role of registry in verification, not liable for information entered

Search criteria on identification of debtor and serial numbered collateral

Secured registry data, data back up

COLLATERAL REGISTRY – LIKELY FEATURES

4. Global Portfolio and

Impact on Reforming

Jurisdictions

20

AFRICA Ghana Liberia Malawi Rwanda Zambia Nigeria

MENA Afghanistan

Jordan Lebanon

UAE West Bank &

Gaza Morocco

EAST ASIA & PACIFIC

Cambodia PRC

Lao PDR Mongolia

Philippines PRC

Indonesia

SOUTH ASIA India

Bangladesh Sri Lanka

ECA Azerbaijan

Belarus Uzbekistan

LAC Colombia Costa Rica

Haiti

Pipeline Regional West & Central Africa, South Sudan, Egypt, Nepal, Belize, El Salvador

CURRENT GLOBAL PORTFOLIO

21

Law reform and new centralized online registry for movable assets launched in March 2012

After 18 months of operation of the new registry, 170,000 new loans for a value of $2.5 billion have been registered and 340,000 searches conducted

Around 90,000 SMEs have received loans

GHANA

http://www.youtube.com/watch?v=5c84WF02_IY

MORE THAN US$ 10 BILLION IN FINANCING

30,000 MICRO BENEFICIARIES AND 10,000 SMEs

60,000 + REGISTRATIONS

23

GHANA

Supply Chain Financing: CAL BANK Developed a local supply chain for mining corporations, through local SME service providers

Impact

100 + local SMEs received > USD$

10 million. Created hundreds of new jobs.

Movable assets (contracts, receivables, equipment) as collateral

No defaults in 30 months

24

AFGHANISTAN

1US$ = 50 AF. 23.6 Billion AF = $470 million

25

1. Law reform and new centralized online registry (October 2011)

2. Over 150,000 loans have been registered for a total secured amount estimated at over USD$200 billion

MEXICO 3. Loans secured with movables have multiplied by 4

4. 45% of the loans to the agricultural sector and 95% to SMEs

5. Businesses have saved US$4 billion in fees

26

PRC RESULTS

MORE THAN US$ 4 TRILLION IN FINANCING

MORE THAN 100,000 BENEFICIARIES SMEs

600,000 + REGISTRATIONS

INCREASES ACCESS TO CREDIT AND MOSTLY BENEFITS SMEs: 84% of the borrowers receiving loans secured with movables (receivables) were SMEs. Almost none of the SMEs surveyed had any loans secured with receivables before the reform

ALLOWS BUSINESSES WITHOUT IMMOVABLE PROPERTY TO ACCESS CREDIT USING ONLY MOVABLES AS COLLATERAL: 40% of businesses are able to use only movable assets as collateral

FACILITATES AND INCREASES ACCESS TO CREDIT FOR WOMEN ENTREPRENEURS: 23% of SMEs surveyed were majority owed by female and 63% had females among their owners

NPL RATES FOR LOANS SECURED WITH RECEIVABLES VS. LOANS SECURED WITH IMMOVABLES: On average equal or less NPL rate for loans secured with receivables

IMPORTANT SPILLOVER EFFECT ON NON BANK LENDING: Leasing and factoring. Leasing grew from $2 billion to $70 billion in the first year

PRC: INDEPENDENT EVALUATION FINDINGS

Source: Independent evaluation of IFC Secured Transactions Project in PRC by Dalberg

44%

42%

52%

60%

69%

45%

57%

13%

8%

8%

28%

18% 6%

0%

0%

0%

•100% •0%

•23%

Serve SME clients from new industry sectors

Gain better information about SME clients

•18%

Reduce the cost of capital to SME clients •40%

Offer existing SME clients new types of lending products

Attract new SME clients •23%

•4%

•36%

•44%

Increase access to finance for enterprises of all sizes

Serve new segments of SMEs

•52%

•4%

Source: 50 FIs surveyed in Anhui, Guangdong, Shanxi, Shandong, Shanghai, Zhejiang, Beijing

Not Very Important Very Important Somewhat Important Not At All

•4%

REDUCES THE GAP OF THE “UNDERSERVED SME SEGMENT”: more than 80% of FIs confirmed that they started serving new segments and attracted new clients

REDUCES THE COST OF CREDIT: 92% of FIs confirmed that it helps to reduce the cost of capital to SME clients

PRC: INDEPENDENT EVALUATION FINDINGS

29 Source: 126 enterprises surveyed in Beijing, Chengdu, Hangzhou, Wuhan and Zhengzhou, out of which 100 are SMEs.

6

21

43

88

Others

Growth in employees

Growth in client base

Growth in business

Benefits of financing obtained for SMEs business

Majority of enterprises think that their businesses would be impacted if they had not obtained financing using A/R

• Business growth is cited as the most common benefit of A/R loans

• Specifically, growth refers to increased sales, production, and product types as well as a greater number of marketing channels and business partners

Note: Respondents can choose more than one reason. This result holds across location, sector, firm age and firm size.

INCREASES BUSINESS GROWTH, TO A LESSER EXTENT EMPLOYMENT LEVELS: 88% of the borrowers receiving loans secured with movables mentioned business growth as the main impact

PRC: INDEPENDENT EVALUATION FINDINGS

ADDITIONAL IMPACT MEASURED THROUGH EVALUATIONS

Type of collateral accepted

Effect on NPLs

Effects on the SME product offering

Effects on the type of client

Obstacles faced by Financial Institutions to introduce new financial products around movable asset collateral

EFFECT ON SMEs EFFECT ON FINANCIAL INSTITUTIONS

Employment creation

Increase in sales

Increase in investments, exports

Decrease in cost of credit

Changes in the financing structure

Impact on different SME segments

Impact on women entrepreneurs

More than 100 local SMEs have received more than US$ 10 million. Created hundreds of new jobs.

SMEs use movable assets (contracts, receivables, equipment) as collateral

No defaults in the 30 months that program has been operating

COLLATERAL REGISTRIES - GHANA: IMPACT ON SMEs THORUGH SUPPLY CHAIN FINANCE

CAL BANK: Purchase Financing Scheme for Gold Mining

Developed a local supply chain for big mining corporations, through local SME service providers

OVERALL – 60,000 loans registered for a value of US$14 billion. More than 8,000 SMEs and 30,000 Micro received loans. Collateral by type: Inventory & receivables (25%), Household goods (20%), vehicles (19%)

32

IMPACT ON CONFLICT AFFECTED COUNTRIES: AFGHANISTAN COLLATERAL REGISTRY

1US$ = 50 AF. 28.79 Billion AF = $575 million

AFGHANISTAN COLLATERAL REGISTRY STATISTICS (As of

January 2014) Indicators

Commercial Bank Users All Government Account (FSD/DAB) 13 Micro Finance Institutions (MFIs) 1 Total Number of Registered Notices 1770 Total Number of Search 4065 Total Value of Registered Credit 28.79 Billion AF

Chargor Size (Less than 15 Employees) 1178 Chargor Size (Less than 30 Employees) 170 Chargor Size (Less than 50 Employees) 59 Chargor Size (Less than 100 Employees)

29

Chargor Size (More than 100 Employees)

35

Ownership Composition (Male) 1452 Ownership Composition (Female) 4 Ownership Composition (Male & Female) 15

• In Viet Nam, legal reform and new centralized online registry (March 2012)

• Over 200,000 loans have been registered to more than 100,000 SMEs

• Total volume of financing through the registry is US$ 2.5 billion

• In PRC, legal reform (2007) and new centralized online registry for accounts receivables and leasing (2008)

• More than US$ 6 trillion in financing with receivables, mostly to SMEs (60%)

• Development of the factoring and leasing industries

• In Colombia new Secured Transactions Law in 2013 and new centralized collateral registry in March 2014

• In 6 months more loans registered than in the last 30 years. More than 58,000 loans registered for a value of more than US$ 10 billion

RESULTS OF CREDIT COLLATERAL REGISTRY PROJECTS IN OTHER REGIONS

6. Reform Challenges and Lessons Learned

Partner with a strong institution with strong political clout. Public and private commitment is critical. 1

Reform based on international accepted standards can be done in any legal system but more difficult to accept in civil law countries 2 Local ownership is key: client monetary or in-kind contributions; local lawyers, local software solutions and IT support strengthen

client ownership and sustainability 3

LESSONS LEARNED

Solid legal regime is important but so is a modern well designed registry and extensive training 4

Financial institutions need to be willing to lend. If they don’t you can have the best system in the world but the impact will be

insignificant 5

Elaine MacEachern

Global Product Specialist, WBG/IFC Secured Transactions

emaceachern@ifc.org

THANK YOU