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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.

Secured Transactions and Collateral


Registries: A Global Perspective
Access to Finance, World Bank Group
Sharing Ideas for Effective Policies,
Jakarta, Indoneisa October 15-16,2014
Elaine MacEachern
WBG,Global Product Specialist

1. Why
WBG/IFCs Focus
on Secured
Transactions?:
Clear Market
Failure in East
Asia Pacific

SME FINANCE GAP


400 million SMEs in developing world
50% unserved or underserved

1. Why is IFC
Focusing in this
Area?: Clear
Market Failure

14% with loan or line of credit

COLLATERAL GAP
Mismatch between assets owned by companies and
collateral required
Capital Stock of Firms

Collateral Taken by FIs


44%

22%

27%

73%

34%

Vehicles/machinery/equipment

Land / Real Estate

Movable property

Accounts Receivable
Land / Real Estate
Source: World Bank Enterprise Surveys

Current EAP Context

SNAPSHOT OF SECURED TRANSACTIONS AND ACCESS TO CREDIT IN BOTH REGIONS


Percent of firms
Value of
Percent of firms
Percent of firms Percent of firms
Proportion of
identifying
collateral
with a bank
whose recent using banks to
Regional Economy
access to finance
loans requiring needed for a
loan/line of
loan application
finance
as a major
collateral (%) loan (% of the
credit
was rejected
investments
constraint
loan amount)
East Asia & Pacific
35
17.1
78.3
197.5
9.2
22.1
Eastern Europe & Central Asia
16.8
36.7
82.2
210.1
8.7
26.1
High income: OECD
13.9
51.6
65.1
151.1
5.6
37.2
Latin America & Caribbean
31.1
45.8
72.1
204.1
...
32.7
Middle East & North Africa
38.5
20.4
76.5
182.5
10.3
23.5
South Asia
33.4
34.8
84.3
278.1
16.3
29.4
Sub-Saharan Africa
41.7
23.6
79.3
174.6
13.3
18.2
Source: World Bank Enterprise Surveys

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)

RANKING ON GETTING CREDIT INDICATORS


Borrowers and Creditors Right Index (0-10)
OECD

Europe &Central Asia

East Asia & Pacific

Latin America &


Caribbean

South Asia

Sub-Saharan Africa

Middle East & North


Africa

3
Source: World Bank Doing Business 2014

Average Bureau Coverage (% of adults)

59

OECD
31.2

Latin America & Caribbean


6.6

Europe & Central Asia

1.7

Middle East & North Africa

0.6

South Asia

19.7

2005

9.9

2014

7.7
3.5

Sub-Saharan Africa

37.5

33.4
9.6

East Asia & Pacific

66.7

5.9
10

20

30

40

Percent of Adults

50

60

70

80

WHY ARE FINANCIAL INSTITUTIONS NOT WILLING TO TAKE


MOVABLE PROPERTY AS COLLATERAL?
Lack adequate legal
framework

Lack registry of
security interests in
movables

Lack know how on


movable asset
lending

Lack interest

Restrictions on types of
assets

Dysfunctional Registry/
No Registry

No experience with this


type of financing

Not their type of


business

Lack of clear creditor


priority

Lack of publicity

Do not have staff with


necessary skills

No competition in the
lending markets

Enforcement issues

No transparency

Revenue from other


sources (TB)

2. Potential
Impact of Secured
Transactions
Reforms in Access
to Credit

BENEFITS OF A SOLID SECURED TRANSACTIONS SYSTEM


BENEFITS OF A SOLID SECURED TRANSACTIONS SYSTEM
INCREASES ACCESS TO
CREDIT REDUCING THE
RISK OF CREDIT
- Underserved
MSMEs and
women
entrepreneurs
- Promotes risk
management,
prudent lending

INCREASES MARKET
COMPETITION

- Development of
industries
(factoring and
leasing)
- NBFIs

- Better
interest rates
- Move from
informal to
formal financing
- Cost savings for
businesses
- Credit risk
diversification:
immovable and
movable
- Sector
diversification in
the portfolio

10

REDUCES THE COST


OF CREDIT

PROMOTES CREDIT
DIVERSIFICATION

Collateral Registries for Movable Assets:


Does their Introduction Spur Firms Access to Finance?
by Inessa Love, Sole Martnez Pera and Sandeep Singh

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

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.

11

3. IFCs Secured
Transactions
Programs:
Business and
Delivery Model

SECURED TRANSACTIONS SYSTEMS


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

Bank Accounts

Industrial and agricultural


equipment

Accounts receivable

Durable consumer
goods

Inventory and raw goods

Intellectual Property
rights

Agricultural products (crops,


livestock, fish farm)

Vehicles

BUSINESS AND DELIVERY MODEL HOLISTIC APPROACH


LEGAL AND
REGULATORY
FRAMEWORK

MONITORING
IMPACT &
COMMUNICATION
S

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

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

BUILDING THE
CAPACITY OF
STAKEHOLDERS

PRINCIPLES FOR AN EFFECTIVE SECURED TRANSACTIONS


SYSTEM
Broad
scope

Registry
Regulations

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

15

Enforcement

Effective
Secured
Transactions
System

Priority

Creation

Publicity /
registration

CENTRAL BANK REGULATIONS ON COLLATERAL


ELIGIBILITY AND PROVISIONING ARE KEY
BASEL II: COLLATERAL
RISK MANAGEMENT
THE STANDARDIZED
APPROACH
THE INTERNAL RATINGSBASED 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)
16

CENTRAL BANK REGULATIONS ON COLLATERAL


ELIGIBILITY AND PROVISIONING ARE KEY
COLLATERAL ELIGIBILITY
Methods

Eligible Collateral

Standardized
Approach

Cash, Gold, and Certain eligible marketable securities.


Cash, Gold, and Certain eligible marketable securities.

IRB Approach

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
17

COLLATERAL REGISTRY LIKELY FEATURES


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

18

4. Global
Portfolio and
Impact on
Reforming
Jurisdictions

CURRENT GLOBAL PORTFOLIO

AFRICA

MENA

Ghana
Liberia
Malawi
Rwanda
Zambia
Nigeria

Afghanistan
Jordan
Lebanon
UAE
West Bank &
Gaza
Morocco

Pipeline

EAST ASIA
& PACIFIC

SOUTH
ASIA

ECA

LAC

Cambodia
PRC
Lao PDR
Mongolia
Philippines
PRC
Indonesia

India
Bangladesh
Sri Lanka

Azerbaijan
Belarus
Uzbekistan

Colombia
Costa Rica
Haiti

Regional West & Central Africa, South Sudan, Egypt, Nepal, Belize, El Salvador
20

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

21

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

GHANA
MORE THAN US$ 10 BILLION IN FINANCING
30,000 MICRO BENEFICIARIES AND 10,000 SMEs
60,000 + REGISTRATIONS

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
23

AFGHANISTAN

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


24

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

MEXICO

3. Loans secured
with movables
have multiplied
by 4
4. 45% of the
loans to the
agricultural
sector and 95%
to SMEs

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

5. Businesses
have saved US$4
billion in fees

25

PRC
RESULTS
MORE THAN US$ 4 TRILLION IN FINANCING
MORE THAN 100,000 BENEFICIARIES SMEs
600,000 + REGISTRATIONS
26

PRC: INDEPENDENT EVALUATION FINDINGS


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

PRC: INDEPENDENT EVALUATION FINDINGS


REDUCES THE COST OF CREDIT: 92% of FIs confirmed that it helps to reduce the cost of
capital to SME clients
REDUCES THE GAP OF THE UNDERSERVED SME SEGMENT: more than 80% of FIs
confirmed that they started serving new segments and attracted new clients

Increase access to finance for enterprises of all sizes


Serve new segments of SMEs

44%

Reduce the cost of capital to SME clients

13% 0%

52%

8% 0%

60%

4%

36%

Attract new SME clients

69%

23%

Gain better information about SME clients


Serve SME clients from new industry sectors

42%

40%

Offer existing SME clients new types of lending products

23%
18%

Somewhat Important

8% 0%
28%

45%
57%

18%

0%
Very Important

4%

44%

52%

4%
6%

100%
Not Very Important

Not At All

Source: 50 FIs surveyed in Anhui, Guangdong, Shanxi, Shandong,


Shanghai, Zhejiang, Beijing

PRC: INDEPENDENT EVALUATION FINDINGS


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

Benefits of financing obtained for SMEs


business
88

Growth in business
43

Growth in client base


Growth in employees
Others

21

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

ADDITIONAL IMPACT MEASURED THROUGH EVALUATIONS


EFFECT ON SMEs

EFFECT ON FINANCIAL INSTITUTIONS

Employment creation

Type of collateral accepted

Increase in sales

Effect on NPLs

Increase in investments,
exports

Effects on the SME product


offering

Decrease in cost of credit

Effects on the type of client

Changes in the financing


structure

Obstacles faced by Financial


Institutions to introduce new
financial products around
movable asset collateral

Impact on different SME


segments
Impact on women
entrepreneurs

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

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

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%)

IMPACT ON CONFLICT AFFECTED COUNTRIES: AFGHANISTAN COLLATERAL REGISTRY


AFGHANISTAN COLLATERAL
REGISTRY STATISTICS (As of
January 2014)
Commercial Bank Users

Indicators
All

Government Account (FSD/DAB)

13

Micro Finance Institutions (MFIs)

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)
Chargor Size (More than 100
Employees)
Ownership Composition (Male)

29
35
1452

Ownership Composition (Female)

Ownership Composition (Male & Female)

15
1US$ = 50 AF. 28.79 Billion AF = $575 million
32

RESULTS OF CREDIT COLLATERAL REGISTRY PROJECTS IN


OTHER REGIONS
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

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 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

6. Reform Challenges
and Lessons Learned

LESSONS LEARNED

1
2

Partner with a strong institution with strong political clout.


Public and private commitment is critical.
Reform based on international accepted standards can be done in
any legal system but more difficult to accept in civil law countries

Local ownership is key: client monetary or in-kind contributions;


local lawyers, local software solutions and IT support strengthen
client ownership and sustainability

Solid legal regime is important but so is a modern well designed


registry and extensive training

Financial institutions need to be willing to lend. If they dont you


can have the best system in the world but the impact will be
insignificant

THANK YOU
Elaine MacEachern
Global Product Specialist, WBG/IFC Secured
Transactions
emaceachern@ifc.org