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, Sibongile seized the opportunity presented by the passage of South Africa's Black Economic Empowerment Act in 2003: she started her own business, SRS 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 (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, Georgia, Korea, Peru, Saudi Arabia and the United States 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. 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: 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. (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 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 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. 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 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 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, Sri Lanka exempted secured creditors from automatic suspension 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 each set up a private credit bureau. Zambia is doing so.

Six more economies in Eastern Europe 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 Monetary Union made information accessible to banks online. That led to exponential growth in coverage in Cameroon, Chad, the Republic of Congo and Gabon. Sri Lanka's credit bureau and West Bank and Gaza's public credit registry set up systems allowing banks to update information and obtain credit reports online.

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 allow individuals and firms to inspect their credit data in all central bank offices. Morocco 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 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 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 and the Caribbean, and it now ranks behind only the OECD 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 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. Now people with a cell phone but no bank loans can still build a credit history--particularly important in poor economies.

NOTES

(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.