New Ways to Support Financial Market Infrastructure PARTNERSHIP PROPOSAL I. Economic Rationale for Secured Lending and WBG Current Assistance There is an expanding evidence base on the importance of collateral in credit markets, including recent work on impact of collateral reforms in developing countries 1. Economic analysis suggests that reforms to increase the effectiveness of secured transactions law and registries considerably improve a country's lending markets. Countries that score higher on the collateral index have greater access to credit, better ratings of financial system stability, lower rates of non-performing loans, and a lower cost of credit 2. The World Bank Group has been providing assistance and advice on moveable collateral lending (secured transactions) for more than a decade. However, WBG activities on this topic are fragmented, and interventions at the country level on moveable collateral are typically developed on an ad hoc basis rather than based on a strategic approach. Today, a number of WBG programs address aspects of the development framework for secured lending and moveable collateral. Some of them have been around for many years, such as the ROSC program, while others, such as the emerging Financial Infrastructure product line, are relatively new. Opportunities exist to leverage the work being done by different units of the World Bank and IFC, to increase impact in the field. The current units of the WBG working on secured transactions are illustrated below. Annex 1 also includes the project portfolio (completed, ongoing and projected projects) from the different WBG units working on this area. Table 1: Moveable Collateral Lending Programs within the World Bank Group WBG Institution IBRD VP/Department/Unit Legal VPU ICR ROSCs Focus area - Creditors rights - Insolvency Delivery Instrument Diagnostics and recommendations Team resources TL: Mahesh Uttamchandani + 2 staff FPD Financial Systems (FSAPs) - Secured lending Policy advice FPD/PSD - Secured lending Loans TL: Susan Marcus, Roberto Rocha + staff Various TLs 1 See The Irresistible Case for Moveable Collateral, IFC, 2006. 2 Doing Business in 2005, World Bank.
WBG Institution IFC VP/Department/Unit FIAS/Financial Infrastructure (Secured Lending team) Focus area - Secured lending laws - Moveable collateral registries Delivery Instrument Advisory Services / Implementation of reforms Team resources TL: Alejandro Alvarez de la Campa + 4 staff Doing Business (Data & Analysis and DB Reform) Legal Rights Index of Getting credit indicators Data & Analysis Implementation of Reforms TL: Marialisa Motta + 6 staff The work of the WBG therefore involves a number of expert groups, across both Bank and IFC, providing different, but complementary, instruments to serve client needs. Nevertheless, the WBG work on moveable collateral has not reached critical mass and lacks the appropriate level of coordination. There is a stated desire by management to elevate the program and yet the pipeline represents more of a continuation of one-off project development. The projected pipeline of projects for FY09 is focused on a relatively few smaller countries and on the culmination of an AAA project for China. This modest approach does not begin to respond to the potential demand for secured transaction reform, as will be discussed in the following section. II. Market Demand The market demand for assisting government clients with this topic is considerable and growing, as shown by the following factors: 1. Increasing project portfolio in the IFC s Secured Lending Program. In FY07, IFC s Secured Lending Program only had 2 active projects. But requests from governments to IFC-FIAS to implement full-fledged secured transactions reforms, including the revision of the legal framework and the creation of collateral registries, is quickly expanding. Today, the IFC-FIAS group is working actively in 8 countries and has requests to work in 7 more. 2. New demand via the Doing Business Reform group. The Doing Business Reform Unit will work on strengthening the Legal Rights Index in approximately 10 countries this FY and is constantly receiving requests to improve the DB indicators. (They receive 50 requests on average each year, although not all of them include the Legal Rights Index.) 3. Huge potential market demand according to Doing Business and ICR ROSC data. The DB data from the Legal Rights Index in the Getting Credit section provide valuable insights into the potential agenda for work. The data demonstrates that a vast majority of developing countries have very poor legal and institutional environments for secured lending and moveable collateral, with approximately one-third (58/181) scoring 3 or below on a scale of 10 and 61% (111/181) scoring 6 or below. Therefore, there is a great need for reforms in both the legal framework and the infrastructure (collateral registries). Among the low performing countries are several of the world s largest economies such as Brazil, Russia and Indonesia. The ROSC results tell a similar story. Of the countries examined under the ICR ROSC diagnostic since its inception, 86% have required significant reforms relating to the legal, regulatory and institutional framework for moveable collateral (one of five areas examined by the ROSC). 2
III. New Strategic Vision Based on the aforementioned factors, there is an urgent need to develop a strong, sustainable program on secured lending and movable collateral during FY09 and FY10 which is recognized for excellence on this topic both inside and outside the WBG. The program would generate data, develop empirical research on secured lending, communicate findings and insights to policymakers, donors and the broader development community and guide legal, regulatory and institutional (registry) reforms in a growing number of countries around the world. It would also serve as a focal point for reforms in this area within the WBG and would coordinate with the FSAP, ROSC, Financial Infrastructure, Doing Business Reform and other groups to ensure consistent treatment of the topic across diagnostics and Bank Group products and interventions. Specifically, the following measurable goals should be reached by the end of FY10: Box 1: Strategic Goals to be Met by FY10 1. Undertake in-depth reforms including legal framework reform and registry development in at least 15 countries (accompanying the reform process). 2. Engage at least 50 countries in dialogue on this topic through missions and / or events (coordinate this approach with FSAP, ROSC, Doing Business and other diagnostics such as Financial Infrastructure). 3. Develop regional approaches in at least two key regions. The two most feasible regions to pilot this regional approach are Africa through OHADA and the Pacific Islands. 4. Develop basic data on activity (registries and laws / regulations) through the existing survey instruments. 5. Develop an empirical research agenda to make use of the new data leveraging DEC researchers, outside academics and others; publishing at least two working papers through the Financial Infrastructure Series or other Bank publications. 6. Develop tools that help standardize the product and a toolkit or guide for moveable collateral assessments, including a possible guidance note on moveable collateral to be used in the FSAP program. 7. Ensure integration of existing, recognized standard into core work in this area. 8. Review and revise existing WBG key documents providing guidance on moveable collateral. IV. The Way Forward Achieving the objectives set out in the new strategic vision will require a much more focused approach supported by the right tools and instruments to minimize costs and maximize resources, although given the considerable growth in demand, it is expected that additional resources will be needed. 1. Target Markets The strategy for the group in FY09 should be focused on IDA countries and all regions (Africa, Latin America 3, MENA, EAP and SA) except ECA. The choice of Africa represents a clear 3 In the Latin America region, Venezuela, Paraguay, Brazil, Nicaragua, Ecuador, Bolivia, Haiti and the Dominican Republic all have legal rights index scores of 3 or less and countries in the region scoring only 4 include Argentina, Chile and Mexico. 3
priority, where need for reform is great and donors are active. ECA has already had a significant reform agenda in this area, and while incomplete, seems to be less of a priority for an enhanced work program. Efforts should also be taken to include some of the large economies which have low scores on the legal rights index, such as Russia, Indonesia, the Philippines and Brazil. The selection of priority regions and countries should be taken in consultation with WBG regional departments and with other focused diagnostics and programs where leverage is possible, including the FSAP, ROSC, Doing Business Reform Unit and IFC s Financial Infrastructure programs. Both LAC and MENA appear promising for regional reform efforts, both due to deficiencies in the systems for moveable collateral in countries in these regions and due to both WBG and country appetite for further financial infrastructure development. 2. Systematic Approach in All Product Offerings Developing a common approach to the topic of moveable collateral inside the WBG requires much more dialogue and collaboration between the different units listed in Table 1. A more systematic approach should be developed so that the WBG speaks with one voice in this area. Some of the elements that could help achieve a more comprehensive and common approach are: Updated database on project portfolio: maintaining a database that could be updated periodically so that all units are aware of where projects are being implemented. Organization of joint missions in countries where a full fledged reform is envisaged and where there is common demand. Common Knowledge sharing agenda, through the organization of events, publications, network meetings, group of practitioners, conferences, etc. There is a need for achieving greater coordination and knowledge sharing within the WBG without hindering the ability to be responsive to client needs. This is best achieved through the creation of an informal collateral network (perhaps through the use of a listserv email distribution) whereby members of the network, representing the units listed in Table 1, would keep each other informed of WBG activities in the area, thereby exploiting the existing knowledge base and exploring avenues of cooperation. Measure impact, through existent instruments and additional mechanisms such as collection of data on secured lending using moveable collateral. Recognizing the unique contribution of each group to the overall picture. Some of the interventions are focused on the policy side and offer in-depth diagnostics and policy recommendations (FSAPs, ROSCs). Others offer a more comprehensive assistance that goes from solution design to implementation and M&E (IFC s Secured Lending Program and Doing Business Reform) that puts the recommendations of the diagnostics into practice. Box 2 below describes how a comprehensive and coordinated approach to moveable collateral has worked in one country Nepal. 4
Box 2: Case Study: WBG Synergies in Moveable Collateral Nepal In 2007, the IBRD Legal VPU (LEGPS) delivered to the Government of Nepal (GON) the ICR ROSC diagnostic. The diagnostic was conducted at the request of the GON and looked at the legal, regulatory and institutional framework for collateral, credit, liquidation and restructuring. The ROSC made a number of recommendations in these areas, but the paramount recommendation was the creation of a registry for recording interests in moveable collateral. In coordination with FPD, the ROSC team liaised with FIAS (CICRS) to conduct a feasibility study. FIAS then continued to develop, and is currently implementing, a major collateral reform project to revise the existing secured transactions law and build an electronic collateral registry. In 2002, IBRD/IDA under a Technical Assistance Loan granted to Nepal included a component to enhance the credit information as one of the overall financial sector reform. IFC Advisory Services (through IFC-SEDF) is supporting the reform of the credit information system providing assistance on the legal and regulatory reform and on the creation of a full comprehensive credit bureau with the intervention of the Global Credit Bureau Program. Nepal Rastra Bank is the implementing Agency and the final beneficiary will be the Credit Information Bureau where both credit information and collateral data will be managed 3. Expand Resource Base The strategic vision put forth in this document, and specified in Box 1 Strategic Goals -and in the previous section on developing a systematic approach to moveable collateral across the WBG is achievable but it will require management commitment to the strategy and increased resources, both in terms of human and financial resources. We suggest the following approach to meeting these resource needs. Funding. Funding is required both to provide access to increased human resources (consultants, staff, etc.) and to provide travel budget so that the FIAS unit members can be highly responsive to client demands including those identified through the ROSC, FSAP and Doing Business initiatives. The group must have the ability to also be proactive in developing regional and national outreach strategies and developing awareness of the importance of collateral reform. This proactive approach is critical for program development and moving toward a more robust pipeline of projects and greater impact on the ground. Each of the units within the WBG working on moveable collateral lending has secured budgets for their programs. Taking into account the current demand, and existing Bank mandates (e.g., to conduct FSAPs and ROSCs) these budgets are neither fungible, nor sufficient. If demand was to increase and more scope for collaboration is envisaged, the program would need to search for an additional pool of common funds to respond to the increasing demand. Donor funds would be the most feasible option to expand the funding base. Donors have so far shown strong interest in this product 4. We should leverage on the experience of other programs like the Credit Bureau Program that went through a similar process in the past (getting considerable funding from Visa to revamp the program). It is estimated that the additional budget needed to revamp the secured lending program integrating more the overall approach would between US$ 600,000 to 1 million for the next two years. 4 The FIAS/Financial Infrastructure Secured Lending Program currently receives funds from the Netherlands (NIPP) and Switzerland (SECO); other donors have expressed interest in this area. 5
Staffing. If we are to achieve a common approach by involving the different teams in the programs, there is an obvious need for additional staff and training or capacity of current staff in the different aspects of each program. It is estimated that for the initial period (FY09-10) two additional F level staff would be needed to complement the work of each group and cope with the increasing demand. The question of where the new staff is placed within the organization will depend on current staffing structures, needs, funding available, etc. Outsourcing, seeking external expertise. Outsourcing would be another potential option that would allow the program to expand the resource base without committing on a long term basis. The FIAS Secured Lending Program receives advice from an Advisory Panel composed of worldwide recognized experts in this area, and has access to an extensive network of outside experts. We could build on this existing structure to design the outsourcing strategy. Outsourcing can also involve, where possible, cross-support drawing upon existing bank expertise (ie within the collateral network described above). Strengthening our External Secured Lending Network. The current external network with clients, with financial regulators, with Financial Institutions and with collateral registries is very weak, almost inexistent. The Program would benefit tremendously by strengthening this Network and by sharing experiences in the area of secured lending. An annual network event for external clients and practitioners could be organized. FIAS s SL team is currently conducting a survey of 25 collateral registries that could be a starting point in building this network, as there are plans to extend the number of registries surveyed in the next FY. CONTACT US If you would like to know more about and/or are interested in supporting FIAS work in the area of Secured Lending/Financial Market Infrastructure, please contact: Beat Heggli, Donor Coordination, t. +1 202 458 5566, bheggli@worldbank.org Alejandro Alvarez de la Campa, Secured Lending Product Leader, t. +1 202 458 0075, aalvarez1@worldbank.org 6
Annex 1 - Project Portfolio 5 Region/Country ICR ROSCs FSAP AFRICA Burkina Faso Cameroon WBG SECURED LENDING* PROJECT PORTFOLIO FIAS - Financial Infrastructure Doing Business Reform Ghana Projected FY09 Kenya Liberia Mauritius IBRD FPD/PSD LOANS Nigeria OHADA (16 countries) Rwanda Projected FY09 Projected FY09 Sierra Leone South Africa Uganda Zambia MENA Afghanistan Egypt Jordan Projected FY09 Morocco Tunisia West Bank & Gaza Projected FY09 Yemen ECA Armenia Projected Azerbaijan Projected FY09 Belarus Czech Republic Georgia Kosovo and Kyrgyz Republic update ongoing Latvia Projected FY09 Lithuania Moldova Poland Romania Russia Slovakia Slovenia 5 Columns for Doing Business Reform and IBRD FPD/PSD are to be completed (still gathering information) 7
Turkey Ukraine Uzbekistan EAP China Indonesia Projected FY09 Lao PDR Projected FY09 Mongolia Philippines Thailand Vietnam and update ongoing SOUTH ASIA Bangladesh Projected FY09 India and update ongoing Nepal Pakistan Sri Lanka LATIN AMERICA Antigua Projected Argentina Brazil Bolivia Chile Colombia Dominican Republic Ecuador El Salvador Haiti Honduras Jamaica Guatemala Projected Mexico Projected Nicaragua Paraguay Peru St. Lucia Projected Uruguay *Not all projects cover only secured lending, some of them might only have components on this area like the FSAPs, ROSCs. Also, the list is a mix of diagnostics, assessments, implementation of reforms, etc depending on the Unit that is responsible 8