Insolvency Reform in Africa. Mahesh Uttamchandani Global Product Leader Restructuring & Insolvency World Bank Group

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1 Insolvency Reform in Africa Mahesh Uttamchandani Global Product Leader Restructuring & Insolvency World Bank Group

2 Why do we care about Insolvency Regimes 2 Effective insolvency : Allocating risk in a predictable, equitable, and transparent way, thereby bolstering confidence in the credit system (OECD) Allocate assets efficiently (Haltiwanger) Promote entrepreneurialism and startups (Armour) which lead to job creation (young, small firms) (Haltiwanger) Maximizing value through continuation of a viable enterprise and preserves jobs (OECD) Enabling financial institutions to curtail deterioration of assets by providing a means of enforcing claims (WB) Deepening and broadening capital markets by stimulating the development of a secondary market in debt instruments that allows financial institutions to transfer their loans to entities specialized in the workout process (WB)

3 Stakeholders recover very little from NPLs: Sub- Saharan Africa Country Aggregate value of NPLs (2008) Amount Recovered under current recovery rates Value destruction Recovery Rate DB 2011 Time DB 2011 Total Total Total (cents on the dollar) (years) 1 Kenya 1,091,249, ,192, ,056, Nigeria 4,568,900,000 1,224,465,200 3,344,434, South Africa 6,988,000,546 2,403,872,188 4,584,128, Zambia 367,570,399 99,979, ,591, Total 13,015,720,191 4,053,508,812 8,962,211, SSA Region recovery rate: 23.2 cents on the dollar. SSA Region average time: 3.4 years Source: IMF NPL data and Doing Business 3

4 Insolvency systems in Africa Even basic processes such as liquidation take too long; Reorganization rates are very low; Very little returned to stakeholders; Under-regulation of Liquidators and Receivers 4

5 Restructuring & Insolvency (R&I) technical assistance initiatives Reforming the enabling Environment Developing and implementing the insolvency practitioner regulatory framework Developing and implementing frameworks for efficient debt resolution Increasing the capacity of institutions that implement the insolvency framework 5

6 Restructuring & Insolvency (R&I) technical assistance initiatives Reforming the enabling Environment Developing and implementing the insolvency practitioner regulatory framework Developing and implementing frameworks for efficient debt resolution Increasing the capacity of institutions that implement the insolvency framework 6

7 Malawi World Bank Business Environment Reform Program Focus on increasing access to credit for SMEs Majority of businesses are micro and small Majority are unincorporated Focus on low-cost, fast processes with clear timelines to bind parties Individual Voluntary Arrangement 7

8 Restructuring & Insolvency (R&I) technical assistance initiatives Reforming the enabling Environment Developing and implementing the insolvency practitioner regulatory framework Developing and implementing frameworks for efficient debt resolution Increasing the capacity of institutions that implement the insolvency framework 8

9 Courts unable to resolve cases quickly; Time is the enemy. Region Time (years) OECD 1.7 East Asia & Pacific 2.7 Eastern Europe & Central Asia 2.9 Latin America & Caribbean 3.3 Middle East & North Africa 3.4 Sub-Saharan Africa 3.4 South Asia 4.5 Source: Doing Business data,

10 Entrenched cultures are a challenge Many countries have long histories of bi-lateral and multi-lateral negotiation and low stigma for bankruptcy Their legal cultures promoted the importance of time and cost efficiency, as well as preserving viable assets. Judges are pro-adr and restructuring This is not the case in all regions. How do we catalyze this culture in other countries? 10

11 Montenegro: leveraging existing mediation culture Of the 174 cases that are currently pending in the Commercial Court of Montenegro, only about 4% are in the process of being restructured. Reduce time and cost of Objective insolvency cases and increase reorganization Country Climate Strong, pre-existing ADR platform; Trained mediators; Overburdened courts; No business rescue culture Technical Assistance 1. Provide for preventative mediation in insolvency law 2. Provide for pre-packaged insolvencies to be formally recognized 3. Build capacity of mediators and mediation center Expected Results Debtors incentivized to approach creditors early Mediation platform leveraged for new out-of-court workout forum Lowers transaction costs; and Increase successful reorganizations 11

12 Latvia: rolling out Corporate Debt Restructuring Guidelines (CDRGs) Assistance with the creation of CDRGs Co-hosted workshop to train stakeholders on out-of-court workouts Inclusion of private and public sector in roll-out Guidelines promulgated in August 2009; Provide a non-binding set of principles for multi-creditor workouts; A year later, the top 4 banks, holding 62.9% of loan market shares in Latvia suggest that the CDRGs is a useful tool that provides a framework to address widespread debt distress in the corporate sector. 12