secured transactions and collateral registries a global perspective
DESCRIPTION
This presentation was given at the Policy Dialogue: Financing SMEs: Sharing Ideas for Effective Policies which was held in Jakarta, Indonesia on 15-16 October 2014.Read more about the event: http://bit.ly/1VZsLcbTRANSCRIPT
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
18
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
THANK YOU