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Reforming Collateral Laws to Expand Access to Finance

Author

Listed:
  • Heywood Fleisig
  • Mehnaz Safavian
  • Nuria de la Peña

Abstract

Most readers, especially those with car loans or home mortgages, know about collateral--property that the lender can take away from the borrower in the event that the borrower defaults. In low/middle income countries, it is understood that conservative lenders exclude firms from credit markets with their excessive collateral requirements. Usually, this is because only some property is acceptable as collateral: large holdings of urban real estate and, sometimes, new motor vehicles. Microenterprises, SMEs, and the poor have little of this property but they do have an array of productive assets that could easily be harnessed to serve as collateral. It is only the legal framework which prevents firms from using these assets to secure loans. In countries with reformed laws governing collateral, property such as equipment, inventory, accounts receivable, livestock are considered excellent collateral. This book aims to better equip project managers to implement reforms to the legal and institutional framework for collateral (secured transactions). It discusses the importance of movable property as a source of collateral for firms, the relationship between the legal framework governing movable assets and the financial sector consequences for firms (better loan terms, increased access, more competitive financial sector), and how reforms can be put in place to change the lending environment.

Suggested Citation

  • Heywood Fleisig & Mehnaz Safavian & Nuria de la Peña, 2006. "Reforming Collateral Laws to Expand Access to Finance," World Bank Publications - Books, The World Bank Group, number 7100.
  • Handle: RePEc:wbk:wbpubs:7100
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    References listed on IDEAS

    as
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    3. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-472, May.
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    5. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
    6. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-445, June.
    7. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Daniel Domeher & Raymond Abdulai, 2012. "Land registration, credit and agricultural investment in Africa," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 87-103, March.
    2. Emilio Gutierrez & David Jaume & Martín Tobal, 2023. "Do Credit Supply Shocks Affect Employment in Middle-Income Countries?," American Economic Journal: Economic Policy, American Economic Association, vol. 15(4), pages 1-36, November.
    3. Calomiris, Charles W. & Larrain, Mauricio & Liberti, José & Sturgess, Jason, 2017. "How collateral laws shape lending and sectoral activity," Journal of Financial Economics, Elsevier, vol. 123(1), pages 163-188.
    4. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    5. Cai,Yongyang & Selod,Harris & Steinbuks,Jevgenijs, 2015. "Urbanization and property rights," Policy Research Working Paper Series 7486, The World Bank.
    6. Daniel Domeher, 2012. "Land rights and SME credit: evidence from Ghana," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 11(2), pages 129-143, June.
    7. Thorsten Beck & Meghana Ayyagari, 2015. "Financial Inclusion in Asia: An Overview," Working Papers id:7393, eSocialSciences.
    8. Love, Inessa & Peria, Maria Soledad Martinez & Singh, Sandeep, 2013. "Collateral registries for movable assets : does their introduction spur firms'access to bank finance ?," Policy Research Working Paper Series 6477, The World Bank.
    9. Niinimäki, J-P., 2019. "Credit markets under asymmetric information regarding the law," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 380-390.
    10. Bencheikh, Fayrouz & Taktak, Neila Boulila, 2017. "Access to bank financing and the collateral channel: The case of Tunisian firms before and after the revolution," Research in International Business and Finance, Elsevier, vol. 42(C), pages 874-886.
    11. Charles, Don & McLean, Sheldon, 2020. "A preliminary review of policy responses to enhance SME access to trade financing in the Caribbean," Studies and Perspectives – ECLAC Subregional Headquarters for The Caribbean 45101, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    12. Murillo Campello & Mauricio Larrain, 2016. "Enlarging the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity," The Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 349-383.
    13. World Bank, 2011. "Turkey - Improving Conditions for SME Growth Finance and Innovation," World Bank Publications - Reports 12211, The World Bank Group.
    14. Daniel Domeher & Raymond T., Abdulai, 2012. "Land registration and access to SME credit: preliminary findings," ERES eres2012_002, European Real Estate Society (ERES).
    15. World Bank & International Finance Corporation, "undated". "Doing Business in the East African Community 2011," World Bank Publications - Reports 27390, The World Bank Group.

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