Amman, Jordan, June 25, 2013 Alejandro Alvarez de la Campa Global Product Leader STCR
Secured Transactions and Collateral Registries Program
Access to Finance, IFC
1 . Definition of Secured Transactions
2. Why are Secured Transactions Important?
Why are they important in MENA?
3. MENA Context and Existing Gaps
4. IFC’s Approach to Secured Transactions Reform
5. Global Portfolio and Impact in Reforming Jurisdictions
6. Reform challenges and lessons learned
OUTLINE
1. Definition of Secured
Transactions
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
2. Why are Secured Transactions Important? Why are they important
in MENA?
SME Finance Gap
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Collateral Gap
Source: World Bank Enterprise Surveys
Mismatch between assets owned by companies and collateral required
44%
34%
22%
Vehicles/machinery/equipm ent Accounts Receivable
Land / Real Estate
73%
27%
Land / Real Estate Movable property
Capital Stock of Firms Collateral Taken by FIs
SNAPSHOT OF SECURED TRANSACTIONS AND ACCESS TO CREDIT IN MENA
World Bank Enterprise Surveys – 34% of Firms Consider Access to Credit a Major Constraint
0 10 20 30 40 50 60
Eastern Europe
& Central Asia
Latin America
& Caribbean
South Asia Sub-Saharan Africa
Middle East &
North Africa
Access to a Line of Credit or Loans from Financial Institutions (% of
Firms)
56.92 54.97
45.02
37.54
25.07
0 10 20 30 40 50 60
Eastern Europe &
Central Asia
OECD Latin
America &
Caribbean
South Asia Sub-Saharan Africa
Middle East
& North Africa
Use of Bank Loans to Finance Investments (% of Firms)
49.85
34.18 28.77 27.20 26.21
16.45
Country Loans to Firms requiring collateral (%)
Algeria 79
Egypt 84.4
Jordan 97.6
Lebanon 67.5
Morocco 90
Oman 73.8
West Bank/Gaza 84.5
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
•BENEFITS OF A SOLID SECURED TRANSACTIONS SYSTEM
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• Promotes Credit Diversification
• Increases Market Competition
• Reduces the Cost of Credit
• Increases Access to Credit Reducing the
Risk of Credit - Underserved MSMEs & 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
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
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS
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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)
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS
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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
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS
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ADDITIONAL REQUIREMENTS FOR RECEIVABLES, REAL ESTATE AND OTHER MOVABLE COLLATERAL
Objective market value of collateral and frequent re-evaluation
Loan agreements must include proper description of the collateral
First priority preferred except with certain non-consensual liens (taxes and labor wages)
Banks must have a continuous monitoring process for the collateral
Liquid secondary market for disposing of the collateral
Other requirements for specific types of assets (receivables maturity)
Central Banks may determine or suggest appropriate LTV ratios (i.e.
80% of value of real estate, 70% of value of receivables, etc)
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2 or more Flexible Collateral Legal Framework Restrictive Collateral Legal Framework
Restrictive Collateral Legal Framework
B.2. Lenders may enforce its security right out of court B. The collateral
is legally enforceable Immovable and
Movable Property Only Immovable
Property
None Restrictive Collateral Legal Framework
C.There is a collateral registry in operation
NO N/A
No
Number
of Yes One Neutral Collateral Legal Framework
Yes
No
Yes Yes
Is there a Secured Transaction Law
in place?
What are the legal
standards ? No
Accepts Cash/Gold/eligible marketable securities, Receivables, and other types of
collateral
Yes A. All documentation is binding to all parties
Accepts Cash/Gold/eligible marketable securities and Receivables
No
B.1. Lenders may take legal possession of the collateral in a
timely manner Does the law accept
any type of Collateral ?
Accepts only Cash/Gold/eligible marketable securities
YES
CLASSIFICATION OF COUNTRIES’S POLICIES ON COLLATERAL
ELIGIBILITY: FLEXIBLE, NEUTRAL RESTRICTIVE
3. MENA Context and Existing Gaps
PRINCIPLES FOR AN EFFECTIVE SECURED TRANSACTIONS SYSTEM
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Effective Secured Transactions
System
Broad scope
Creation
Publicity / registration Priority
Enforcement
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION
Types of assets: security rights
(possessory and non-possessory) in all types of movable assets, tangible or intangible, present or future,
including their products and proceeds
Types of parties: all legal and natural persons should be able to create
security rights
Types of contractual agreements: all property rights created contractually to secure the payment of an
obligation: loans; assignments of receivables, retention of title and financial leases, etc (Functional Approach)
PRINCIPLE 1: BROAD SCOPE OF RIGHTS THAT CAN BE CREATED ON
ALL TYPES OF MOVABLE ASSETS
PRACTICES IN MENA
WB SME Lending Survey in MENA
50% of banks accept movable property
Mostly tangible assets (vehicles) and fonds de commerce. No intangibles, no future assets, no pools of assets
described generically, no products or proceeds
Some MENA countries still have “legal”
restrictions on the types of parties
No evidence of functional approach
Notice system – Centralized ,
electronic web-based for real time data
Unity – Registration of all security interests in movable property
Simplicity - information contained limited to what is essential:
creditor, debtor, loan amount, description of the asset
Data and searches accessible to all at real time
Cost effectiveness: reasonable fees
PRINCIPLE 2: PUBLICITY OF SECURITY INTEREST IN MOVABLE
COLLATERAL
PRACTICES IN MENA
Only 1 notice registry (Afghanistan), most registries paper based,
decentralized
No Unity – registration of only certain types of assets
Cumbersome registration:
submission of documents required
Information difficult to access WB SME Lending
Survey in MENA
49% of banks claim problems registering rights on movables
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION
Possibility of out of court
enforcement if agreed by both parties (100+ countries
worldwide)
Fast track processes in court
Rights of the debtor during the seizure proceedings (appeal after seizure, right of redemption, notification of disposition)
PRINCIPLE 3: ENFORCEMENT OF SECURITY INTERESTS IN MOVABLE
COLLATERAL: SEIZURE OF ASSETS PRACTICES IN MENA
Major impediment for increasing access to credit
Only 4 countries in MENA allow for out of court enforcement
Clearly lagging behind all regions in this area
WB SME Lending Survey in MENA
58% of FIs in MENA consider enforcement a major hurdle
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION
SUMMARY OF MAIN RECOMMENDATIONS
1. Broaden the scope of secured transactions: allowing all types of assets, including future assets, proceeds, all types of contractual agreements to be part of the system.
2. Modernize collateral registries : notice system, web based, centralized, cost effective, etc.
3. Improve enforcement mechanisms to execute security interests in movable collateral by introducing out of court enforcement, fast track judicial processes in court and more flexibility in the disposition of the assets (private sale)
4. Awareness about secured transactions is key. Need for training to financial institutions on asset based financing
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Reform Secured Transactions by enacting stand alone ST Laws.
Standard approach to reforms given the similarity in legal frameworks
4. How does IFC implement this
work?
IMPACT / RESULTS: (1) Value of financing facilitated secured with movable property (US$) and; (2) Number of Firms/MSMEs with
increased access to credit Clients
Governments (Central Banks, Ministry of Finance/Economy/
Justice/Trade)
Beneficiaries
Financial Institutions, NBFIs, Firms (mostly MSMEs), Households and Consumers
Funding Model
IFC funds, Pooled donor funds, client contributions
Value Added
In-house expertise, global /local
presence, developed methodology and M&E standards,
demonstrated impact.
SECURED TRANSACTIONS OVERVIEW
• Building the Capacity of Stakeholders
• Monitoring Impact &
Communications
• Creation of Electronic Registry
• Legal and Regulatory Framework
1. Create Committee 2. Draft new Secured Transactions Law 3. Raise awareness 4. Submit Law to Parliament 5. Draft registry regulations
1. Determine
Government Agency to host registry
2. Develop technical specifications
3. Hardware &
software procurement 4.Training/awareness 5. Launching of registry
1. Training and awareness raising stakeholders (public &
private stakeholders), including law and registry
2. Training on movable asset
financing for Financial Institutions
1. Develop monitoring
& evaluation plan including baseline information
2. Conduct periodic monitoring of impact through registry indicators & surveys 3. Communications
1 2
4 3
BUSINESS AND DELIVERY MODEL
5. Global
Portfolio and
Results
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AFRICA
Ghana Liberia Malawi Rwanda
Zambia
MENA
AMF Afghanistan
Jordan Lebanon
UAE West Bank &
Gaza
EAST ASIA
& PACIFIC
Cambodia China Lao PDR Mongolia Philippines
Vietnam
SOUTH ASIA
India Bangladesh
Sri Lanka
ECA
Azerbaijan Belarus Uzbekistan
LAC
Colombia Costa Rica
Haiti
Pipeline Nigeria, Sierra Leone, Indonesia, Egypt, Morocco, Tajikistan, etc
CURRENT REGIONAL PORTFOLIO
MEXICO VIETNAM GHANA
IMPACT OF SECURED TRANSACTIONS REFORMS IN
AFRICA, ASIA AND LATIN AMERICA
Impact
>45,000 loans registered
>USD$6 billion in financing to 5,000 + SMEs and 25,000 + Micro enterprises
Collateral:
Inventory & receivables (25%), household goods (20%)
motor vehicles (19%)
Case Study: Ghana
Legal Framework
Borrowers and Lenders Act, 2008 Registry regulations, 2012
Collateral Registry
New on-line registry, 2012
Next Steps
Enactment of revised B&L Act, 2013
Raise awareness and build capacity
Impact
100 + local SMEs received > USD$ 10 million. Created hundreds of new jobs.
Movable assets (contracts, receivables, equipment) as collateral
No defaults in 30 months
Case Study: CAL BANK: Purchase financing scheme for gold mining
Developed a local supply chain for big mining corporations, through local SME service providers
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1. Law reform and new centralized online registry (October 2011)
2. Over 132,129 loans have been registered for a total secured amount estimated at over USD$200 billion
3. Loans secured with movables have multiplied by 3 4. 30% of the loans to the agricultural sector and 95%
to SMEs
5. Businesses have saved US$3.8 billion in fees
MEXICO
Impact of Secured
Transactions Reform IN Latin
America
Impact of Secured Transaction Reform in East Asia
Law reform and new centralized online registry for movable assets launched in March 2012.
After 1 year of operation of the new registry, 103,000 new loans for a value of $500 million have been registered and 212,000 searches conducted
It is estimated that around 54,000 SMEs have received loans
VIETNAM
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6. Reform challenges
and lessons learned
Partner with a strong institution with strong political clout.
Build consensus among stakeholders. Takes time
1
Public and private commitment is critical: government counterpart commitment and a dynamic and supportive financial sector
2
Local ownership is key: client monetary or in-kind contributions;
local software solutions and IT support strengthen client ownership and sustainability
3
LESSONS LEARNED
Position reforms as a “transformation of the credit market”.
4
Sustain effort with a professional team over time merging local knowledge with global subject-matter expertise.
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