Getting credit.[FIGURE 6.1 OMITTED]
Sibongile was meant to fly. "I grew up near an Air Force base and always had a love for planes," she says, remembering a childhood spent waving at jets at South Africa's Hoedspruit base.
After a successful 7-year career in human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. , Sibongile seized the opportunity presented by the passage of South Africa's Black Economic Empowerment Black Economic Empowerment (BEE) is a program launched by the South African government to redress the inequalities of Apartheid by giving previously disadvantaged groups (black Africans, Coloureds and Indians) economic opportunities previously not available to them. Act in 2003: she started her own business, SRS SRS, SRS-A
see slow-reacting substance. Aviation. Opportunities for government contracts came quickly, but getting financing was difficult. "I took the government tender to the bankers," says Sibongile. "Forget it, they said. Because the amount of money was too large and the collateral too small."
Sibongile ended up using her family's savings, along with her mother's and aunts retirement funds, to finance the first deal: leasinga plane from the Russian Federation. "I remember waiting for days at the airport for the plane to arrive, panicking that after paying so much money and risking people's savings it may not arrive." But all went well in the end, and Sibongile's business took off. (1)
Where collateral laws are effective and credit registries are present, banks are more likely to extend loans. Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. (China), Singapore and Kenya facilitate access to credit through laws that allow all types of assets to be used as collateral and do not require a specific description of the collateral or o bligation. They also have unified collateral registries and allow out-of-court enforcement of security rights.
In (Canada, El Salvador El Salvador (ĕl sälväthōr`), officially Republic of El Salvador, republic (2005 est. pop. 6,705,000), 8,260 sq mi (21,393 sq km), Central America. , Georgia, Korea, Peru, Saudi Arabia Saudi Arabia (sä`dē ərā`bēə, sou`–, sô–), officially Kingdom of Saudi Arabia, kingdom (2005 est. pop. and the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. credit registries record and make available historical credit information on all bank loans--as well as credit from utilities and retailers--for both individuals and companies. The registries also make available both positive information (such as loan amounts and on-time payment patterns) and negative information (such as late payments and defaults). And they allow borrowers to inspect and dispute their information.
Doing Business measures the legal rights of borrowers and lenders and the scope and quality of credit information systems. The first set of indicators describes how well collateral and bank-ruptcy laws facilitate lending. The second set measures the coverage, scope, quality and accessibility op credit information available through public and private credit registries (figure 6.2).
Both creditor protection through the legal system and credit registries are associated with higher ratios of private credit to GDP GDP (guanosine diphosphate): see guanine. . For example, an increase of 1 in the creditors' rights index is associated with a 6.5 percentage point increase in the average annual growth rate of the private-credit-to-GDP ratio in the 3 years after the reform relative to the 3 years before. (2)
Research shows that introducing a credit registry is associated with an increase of 4.2 percentage points in firms' reliance on credit. (3) This is in part because introducing registries increases the repayment rate Noun 1. repayment rate - the amount of money paid out per unit time
installment rate, payment rate, rate of payment
charge per unit, rate - amount of a charge or payment relative to some basis; "a 10-minute phone call at that rate would cost $5" : borrowers become less willing to default, since defaults can prevent future loans. In developing economies the repayment rate can increase by up to 80% when a credit registry starts operation. Small firms benefit the most: in transition economies that introduced new credit registries, their access to credit grew twice as fast as that of large firms. (4)
Strengthening the legal rights of borrowers and lenders allows businesses to invest more in new technologies. One recent study finds that economies that score higher on creditor protections have newer airplanes. (5) Beyond that, their airlines invest in better safety and communication technologies. Why? Part of the reason is that where strong protections are lacking, creditors offer only leasing, not loans. So in economies with weak creditor protections, most planes are leased, and airline owners have less incentive to upgrade their safety features.
New evidence suggests that establishing strong legal rights and new credit registries may also reduce income inequality inequality, in mathematics, statement that a mathematical expression is less than or greater than some other expression; an inequality is not as specific as an equation, but it does contain information about the expressions involved. . (6) One possible explanation is that these changes allow more entrepreneurs to expand their business. Borrowing money from the bank becomes more about their creditworthiness--and less about whom they know.
WHO REFORMED IN 2007/08?
Cambodia's new secured transactions Business dealings that grant a creditor a right in property owned or held by a debtor to assure the payment of a debt or the performance of some obligation.
A secured transaction is a transaction that is founded on a security agreement. law made it the top reformer in getting credit in 2007/08. Albania was the runner-up reformer. It created a new public credit registry with full information on loans of all sizes, for individuals and for firms.
Before the new law took effect in Cambodia, business owners could use only immovable property In all the civil law systems, immovable property is the equivalent of "real property" in common law systems, i.e. it is land or any permanent feature or structure above or below the surface. as collateral. With little land under private ownership, getting a loan was an unreachable dream for most small to medium-size businesses. The new law changed that. Cambodian entrepreneurs can now use a broad range of movable assets to secure a loan. That includes revolving assets such as inventory and accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying . A general description of collateral suffices in loan agreements, permitting such wording as "all assets" or "all movable property" of the borrower. Thanks to these and other provisions of the law, Cambodia's score on the strength of legal rights index shot up from 0 to 9.
Three other economies in East Asia East Asia
A region of Asia coextensive with the Far East.
East Asian adj. & n. and Pacific--Vanuatu, China and Taiwan (China)--also made it easier for businesses to use movable property as collateral. Vanuatu passed a new secured transactions law, the Personal Property Securities Act. China revised its property law to allow borrowers to use a variety of revolving assets and a combined set of assets (such as raw material, production equipment and finished goods) as collateral. The new law is expected to put into circulation more than $2 trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time.
(mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed.
In the USA and Canada, 10^12. worth of movable assets. (7) Taiwan (China) amended its civil code to allow parties to a pledge agreement to set the loan amount as a maximum line of credit.
In South Asia This article is about the geopolitical region in Asia. For geophysical treatments, see Indian subcontinent.
South Asia, also known as Southern Asia , Sri Lanka Sri Lanka (srē läng`kə) [Sinhalese,=resplendent land], formerly Ceylon, ancient Taprobane, officially Democratic Socialist Republic of Sri Lanka, island republic (2005 est. pop. exempted secured creditors from automatic suspension automatic suspension Hospital practice The immediate suspension of a practitioner from the medical staff due to activities of such egregious nature as to warrant said suspension–eg, revocation of the practitioner's state license to practice medicine. of enforcement procedures in court during bankruptcy.
Georgia amended its civil code in June 2007 to allow parties to agree that collateral can be sold without court intervention. Guatemala passed a law in October 2007 establishing a special regime for registering security interests in movable property. The law went into effect in January 2008.
Twenty-seven economies reformed their credit information systems in 2007/08, improving the quality and scope of information collected and distributed by credit registries and bureaus (table 6.2). Uzbekistan created both a public credit registry and a private credit bureau. Albania, Liberia and Montenegro launched new public credit registries--and in Montenegro the coverage of borrowers went from 0 to 26% of the adult population. Ukraine and the United Arab Emirates United Arab Emirates, federation of sheikhdoms (2005 est. pop. 2,563,000), c.30,000 sq mi (77,700 sq km), SE Arabia, on the Persian Gulf and the Gulf of Oman. each set up a private credit bureau. Zambia is doing so.
Six more economies in Eastern Europe Eastern Europe
The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. and Central Asia introduced credit information reforms, bringing the total to 10, the most of any region. Georgia now distributes a full range of information, including on-time repayment patterns and outstanding loan amounts. Coverage has increased 20 times. Kazakhstan's private credit bureau is adding new suppliers of information at a rate of 2 a month. Prominent among them are nonbank institutions such as retailers and utility companies. Coverage has shot up by 80%. Moldova passed a new law to facilitate the creation of a private credit bureau. Azerbaijan, Belarus and the former Yugoslav Republic of Macedonia also reformed.
[FIGURE 6.3 OMITTED]
The most popular credit information reform feature was providing online access to members. The regional public credit registry of the Central African Central African may mean:
Many economies issued regulations guaranteeing borrowers access to their credit information. Egypt issued such regulations for the private credit bureau. Georgia amended its civil code with the same purpose. In the former Yugoslav Republic of Macedonia a new law on personal data protection guarantee that borrowers can review their data in the new public credit registry. In Belarus and Tunisia new laws New Laws: see Las Casas, Bartolomé de. allow individuals and firms to inspect their credit data in all central bank offices. Morocco Morocco, country, Africa
Morocco (mərŏk`ō), officially Kingdom of Morocco, kingdom (2005 est. pop. 32,726,000), 171,834 sq mi (445,050 sq km), NW Africa. published new circulars guaranteeing that borrowers can review their data in credit registries--and laying the groundwork for new private bureaus.
Other economies eliminated the minimum threshold for loans recorded in credit registries. Sri Lanka's private bureau started using a new online system to collect data on all loans, regardless of value. Coverage grew threefold, to around 1.3 million individuals and firms. Azerbaijan saw coverage more than double after eliminating its minimum loan cutoff of $1,100. So did Belarus, after abolishing its $10,000 cutoff. Mauritius too eliminated its cutoff, of $3,000.
Tunisia now collects and distributes more detailed information--both positive and negative--on borrowers. Sri Lanka extended the length of time information is recorded from 1 year to 2--and distributes positive information for 5 years. Indonesia now distributes 2 years of historical information. Vietnam extended the period that data are distributed from 2 years to 5. That helps explain its 49% increase in coverage, to more than 8 million individuals and firms. Finland passed a new credit information law that regulates the use of corporate credit data.
Two economies saw developments that reduced the efficacy of their credit information systems. Indonesia's private credit bureau closed, unable to compete with the public registry (figure 6.3). And Burundi was forced to double the minimum cutoff for loans registered in the database to around $900, to cope with technical limitations and a sudden increase in loan transactions.
[FIGURE 6.4 OMITTED]
WHAT ARE THE REFORM TRENDS?
In the past 4 years 34 reforms have strengthened the legal rights of borrowers and lenders in 27 economies around the world--while 88 reforms have improved credit information systems in 61 economies.
Eastern Europe and Central Asia has had the most reforms strengthening the legal rights of borrowers and lenders in the past 4 years, with a total of 12 (figure 6.4). Large emerging market economies, with the exception of the Russian Federation, also figure prominently on the list of reformers. China was a repeat reformer in the past 2 years, broadening the range of movable assets that can be used as collateral. India reformed in 2 successive years starting in 2006, establishing an online collateral registry and expanding the availability of out-of-court enforcement. Ukraine improved the standing of secured creditors in bankruptcy by giving their claims priority over labor and state tax claims. Vietnam made it easier for entrepreneurs to get a loan by expanding the range of assets that can be used as collateral and by allowing out-of-court enforcement.
Allowing parties to agree to pursue out-of-court enforcement if the debtor One who owes a debt or the performance of an obligation to another, who is called the creditor; one who may be compelled to pay a claim or demand; anyone liable on a claim, whether due or to become due. defaults has been the most popular reform feature strengthening the legal rights of borrowers and lenders (figure 6.5). The ability to make such an agreement can persuade lenders wary of long court procedures to make a loan in the first place. Beyond India and Vietnam, economies that have allowed such agreements include Croatia, France, Ghana, Honduras, the Kyrgyz Republic and Peru.
Establishing a geographically unified collateral registry that covers substantially all movable property has been another popular reform feature. Such a registry allows potential lenders to find out easily and with certainty whether there are competing claims on the collateral. India stands out among those that have taken such a step. Its huge geographic area and large population make its creation of an online, unified national database of security rights in movable assets a notable achievement.
Many economies passed new secured transactions laws. Three of this year's top reformers--Cambodia, Guatemala and Vanuatu--did just that. Peru introduced a new bill on guarantees based on movable property in 2006. Now almost any type of movable asset--tangible or intangible, present or future--can secure a loan, and assets no longer have to be described specifically. More than 20 different types of pledges were consolidated into 1. The country's 17 collateral registries have been combined as well. (8)
The 88 reforms improving credit information in tine tine (tin) a prong or pointed projection on an implement, as on a fork.
1. The slender pointed end of an instrument, such as an explorer used in dentistry.
2. past 4 years have shown clear results: worldwide, coverage by credit registries more than doubled, to around 1.8 billion individuals and firms. The fastest reforming region was Eastern Europe and Central Asia (figure 6.6). Its average score on the depth of credit information index has more than doubled in the past 4 years--from 2.1 points to 4.4 out of a maximum of 6--and its coverage of borrowers has increased by a factor of almost 5. That propelled the region past Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. and the Caribbean, and it now ranks behind only the OECD OECD: see Organization for Economic Cooperation and Development. high-income economies.
More than a quarter of the reforms in credit information involved setting up new registries: 19 economies saw the creation of private credit bureaus; 8 others set up new public credit registries (figure 6.7). The biggest gains were in Eastern Europe and Central Asia, where nearly half the economies established either a public credit registry or a private credit bureau, followed by the Middle East and North Africa.
[FIGURE 6.6 OMITTED]
In 20 economies reforms expanded the range of credit information collected and distributed by public or private credit registries. In 13 of these, the public registry eliminated the minimum cutoff for recording loans, more than quadrupling quad·ru·ple
1. Consisting of four parts or members.
2. Four times as much in size, strength, number, or amount.
3. Music Having four beats to the measure.
n. coverage on average. What made this reform possible in many cases was developing the information infrastructure and shifting from a paper-based to an online system.
In the 8 economies private credit bureaus expanded the sources of credit information to nonfinancial institutions such as utilities (like mobile phone companies) or retailers (like supermarkets and furniture stores). Such changes took place in Bulgaria, Georgia, Kazakhstan, Kenya, Kuwait, Nicaragua, Saudi Arabia and Trinidad and Tobago Trinidad and Tobago (trĭn`ĭdăd, təbā`gō), officially Republic of Trinidad and Tobago, republic (2005 est. pop. 1,088,000), 1,980 sq mi (5,129 sq km), West Indies. The capital is Port of Spain. . Now people with a cell phone but no bank loans can still build a credit history--particularly important in poor economies.
(1.) This example is from the World Bank's Doing Business: Women in Africa (2008a), a collection of case studies on African entrepreneurs.
(2.) Djankov, McLeish and Shleifer (2007).
(3.) Brown, Jappelli and Pagano (2008).
(4.) Brown and Zehnder (2007).
(5.) Benmelech and Bergman (2008).
(6.) Claessens and Perotti (2007).
(7.) World Bank (2007c).
(8.) Marechal and Shahid-Saless (2008).
TABLE 6.1 Where is getting credit easy--and where not? Easiest RANK Most difficult RANK Malaysia 1 Bhutan 172 Hong Kong, China 2 Djibouti 173 South Africa 3 Eritrea 174 United Kingdom 4 Madagascar 175 Australia 5 Tajikistan 176 Bulgaria 6 Yemen 177 Israel 7 Afghanistan 178 New Zealand 8 Syria 179 Singapore 9 Timor-Leste 180 United States 10 Palau 181 Note: Rankings on the ease of getting credit are based on the sum of the strength of legal rights index and the depth of credit information index. See Data notes for details. Source: Doing Business database. TABLE 6.2 More credit information, more access--popular reform features in 2007/08 Provided online access to credit Cameroon, Central African registry Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon, Sri Lanka, West Bank and Gaza Expanded set of information Azerbaijan, Belarus, Georgia, collected in credit registry Kazakhstan, Mauritius, Sri Lanka, Tunisia, Vietnam Introduced regulations Belarus, Egypt, Georgia, guaranteeing that borrowers can Indonesia, former Yugoslav inspect data in credit registry Republic of Macedonia, Morocco, Tunisia Established new credit registry Albania, Liberia, Montenegro, or bureau Ukraine, United Arab Emirates, Uzbekistan Expanded range of revolving Cambodia, China, Guatemala, movable assets that can be used Vanuatu as collateral Allowed out-of-court enforcement Georgia, Guatemala, Vanuatu of collateral Allowed maximum rather than Cambodia, Taiwan (China) specific amounts in debt agreements Gave priority to secured Cambodia, Vanuatu creditors' claims outside and inside bankruptcy procedures Exempted secured creditors' Cambodia, Sri Lanka claims from an automatic stay in reorganization Created a unified registry for Cambodia movable property Source: Doing Business database. TABLE 6.3 Who has the most credit information and the most legal rights for borrowers and lenders--and who the least? Legal rights for borrowers and lenders (strength of legal rights index, 0-10) Most Least Hong Kong, China 10 Burundi 2 Kenya 10 Madagascar 2 Malaysia 10 Rwanda 2 Singapore 10 Afghanistan 1 Australia 9 Bolivia 1 Bahamas, The 9 Djibouti 1 Cambodia 9 Syria 1 Denmark 9 Timor-Leste 1 New Zealand 9 Palau 0 United Kingdom 9 West Bank and Gaza 0 Borrowers covered by credit registries (% of adults) Most Least Argentina 100 Nepal 0.24 Australia 100 Algeria 0.20 Canada 100 Djibouti 0.18 Iceland 100 Mauritania 0.17 Ireland 100 Ethiopia 0.13 New Zealand 100 Madagascar 0.07 Norway 100 Yemen 0.07 Sweden 100 Nigeria 0.06 United Kingdom 100 Zambia 0.05 United States 100 Guinea 0.02 Note: The rankings on borrower coverage reflected in the table include only economies with public or private credit registries (129 in total). Another 52 economies have no credit registry and therefore no coverage. See Data notes for details. Source: Doing Business database. FIGURE 6.2 Rankings ea getting credit are based on 2 subindicators Regulations on nonpossessory 62.5% Strength of legal security interests in movable rights index(0-10) property Scope, quality and accessibility 37.5% Depth of credit of credit information through information index (0-6) public and private credit registries Note: Private bureau coverage and public registry coverage do not count for the rankings. See Data notes for details. Note: Table made from pie chart. FIGURE 6.5 Top 5 reform features in legal rights Reforms including feature since DB2SS6 (%) Allowed out-of-court enforcement 53% of collateral Expanded range of revolving movable 47% assets that can be used as collateral Created a unified registry for 35% movable property Gave priority to secured creditors' 21% claims outside and inside bankruptcy procedures Exempted secured creditors' claims 9% from an automatic stay in reorganization Note: A reform may include several reform features. Source: Doing Business database. Note: Table made from bar graph. FIGURE 6.7 Top 5 reform features in credit information Reforms including feature since DB2006 (%) Established new credit registry 31% or bureau Lowered minimum amount to register 16% loans Adopted regulations that guarantee 16% borrowers the right to access their data Started distributing data from 9% retailers, trade creditors or utility companies Started distributing both positive 5% and negative credit information Note: A reform may include several reform features. Source: Doing Business database. Note: Table made from bar graph.