Secured Transactions and Collateral Registries Program Access to Finance, IFC Amman, Jordan, June 25, 2013 Alejandro Alvarez de la Campa Global Product Leader STCR
OUTLINE 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
1. Definition of Secured Transactions
Secured Transactions Systems Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumer credit Bank Accounts Accounts receivable Inventory and raw goods Intellectual Property rights Industrial and agricultural equipment Durable consumer goods Agricultural products (crops, livestock, fish farm) Vehicles
2. Why are Secured Transactions Important? Why are they important in MENA?
SME Finance Gap 6
Collateral Gap Mismatch between assets owned by companies and collateral required Capital Stock of Firms Collateral Taken by FIs 22% 44% 27% 34% 73% Vehicles/machinery/equipm ent Accounts Receivable Land / Real Estate Land / Real Estate Movable property Source: World Bank Enterprise Surveys
SNAPSHOT OF SECURED TRANSACTIONS AND ACCESS TO CREDIT IN MENA World Bank Enterprise Surveys 34% of Firms Consider Access to Credit a Major Constraint 60 50 40 30 20 10 0 Access to a Line of Credit or Loans from Financial Institutions (% of Firms) 56.92 54.97 45.02 37.54 Eastern Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Africa 25.07 Middle East & North Africa 60 50 40 30 20 10 0 49.85 Eastern Europe & Central Asia Use of Bank Loans to Finance Investments (% of Firms) 34.18 OECD 28.77 27.20 26.21 Latin America & Caribbean South Asia Sub-Saharan Africa 16.45 Middle East & North Africa 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 Benefits of a solid Secured Transactions System 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 Reduces the Cost of Credit Increases Market Competition - Development of industries (factoring and leasing) - NBFIs - Credit risk diversification: immovable and movable - Sector diversification in the portfolio Promotes Credit Diversification 9
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)
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS 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) 11
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS COLLATERAL ELIGIBILITY Methods Standardized Approach Eligible Collateral 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 12
RISK OF MOVABLE COLLATERAL AND ROLE OF CENTRAL BANKS AND FINANCIAL INSTITUTIONS 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) 13
CLASSIFICATION OF COUNTRIES S POLICIES ON COLLATERAL ELIGIBILITY: FLEXIBLE, NEUTRAL RESTRICTIVE Only Immovable Property Restrictive Collateral Legal Framework YES Does the law accept any type of Collateral? Accepts only Cash/Gold/eligible marketable securities Restrictive Collateral Legal Framework A. All documentation is binding to all parties Yes Is there a Secured Transaction Law in place? Immovable and Movable Property Accepts Cash/Gold/eligible marketable securities and Receivables Accepts Cash/Gold/eligible marketable securities, Receivables, and other types of collateral What are the legal standards? B. The collateral is legally enforceable B.1. Lenders may take legal possession of the collateral in a timely manner B.2. Lenders may enforce its security right out of court No Yes No Yes Number of Yes 2 or more Flexible Collateral Legal Framework One Neutral Collateral Legal Framework None Restrictive Collateral Legal Framework No Yes C.There is a collateral registry in operation No NO N/A 14
3. MENA Context and Existing Gaps
PRINCIPLES FOR AN EFFECTIVE SECURED TRANSACTIONS SYSTEM Broad scope Enforcement Effective Secured Transactions System Creation Priority Publicity / registration 16
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION PRINCIPLE 1: BROAD SCOPE OF RIGHTS THAT CAN BE CREATED ON ALL TYPES OF MOVABLE ASSETS 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) WB SME Lending Survey in MENA PRACTICES 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
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION PRINCIPLE 2: PUBLICITY OF SECURITY INTEREST IN MOVABLE COLLATERAL WB SME Lending Survey in MENA PRACTICES IN MENA 49% of banks claim problems registering rights on movables 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 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
APPLICATION OF SECURED TRANSACTIONS GENERAL PRINCIPLES IN THE MENA REGION PRINCIPLE 3: ENFORCEMENT OF SECURITY INTERESTS IN MOVABLE COLLATERAL: SEIZURE OF ASSETS PRACTICES IN MENA 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) 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
SUMMARY OF MAIN RECOMMENDATIONS Reform Secured Transactions by enacting stand alone ST Laws. Standard approach to reforms given the similarity in legal frameworks 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 20
4. How does IFC implement this work?
SECURED TRANSACTIONS OVERVIEW Clients Beneficiaries Funding Model Value Added Governments (Central Banks, Ministry of Finance/Economy/ Justice/Trade) Financial Institutions, NBFIs, Firms (mostly MSMEs), Households and Consumers IFC funds, Pooled donor funds, client contributions In-house expertise, global /local presence, developed methodology and M&E standards, demonstrated impact. IMPACT / RESULTS: (1) Value of financing facilitated secured with movable property (US$) and; (2) Number of Firms/MSMEs with increased access to credit
Legal and Regulatory Framework BUSINESS AND DELIVERY MODEL 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 Creation of Electronic Registry 1 2 5. Launching of registry Monitoring Impact & Communications 1. Develop monitoring & evaluation plan including baseline information 2. Conduct periodic monitoring of impact through registry indicators & surveys 3. Communications 1. Training and awareness raising stakeholders (public & private stakeholders), including law and registry 2. Training on movable asset financing for Financial Institutions Building the Capacity of Stakeholders 4 3
5. Global Portfolio and Results
CURRENT REGIONAL PORTFOLIO 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 25
IMPACT OF SECURED TRANSACTIONS REFORMS IN AFRICA, ASIA AND LATIN AMERICA MEXICO VIETNAM GHANA
Legal Framework Borrowers and Lenders Act, 2008 Registry regulations, 2012 Case Study: Ghana Collateral Registry New on-line registry, 2012 Next Steps Enactment of revised B&L Act, 2013 Raise awareness and build capacity Impact >45,000 loans registered >USD$6 billion in financing to 5,000 + SMEs and 25,000 + Micro enterprises Collateral: Inventory & receivables (25%), household goods (20%) motor vehicles (19%)
Case Study: CAL BANK: Purchase financing scheme for gold mining Developed a local supply chain for big mining corporations, through local SME service providers Impact 100 + local SMEs received > USD$ 10 million. Created hundreds of new jobs. Movable assets (contracts, receivables, equipment) as collateral No defaults in 30 months
Impact of Secured Transactions Reform IN Latin America total MEXICO 1. Law reform and new centralized online registry (October 2011) 2. Over 132,129 loans have been registered for a 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 29
Impact of Secured Transaction Reform in East Asia VIETNAM 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 30
6. Reform challenges and lessons learned
LESSONS LEARNED 1 2 3 4 5 Partner with a strong institution with strong political clout. Build consensus among stakeholders. Takes time Public and private commitment is critical: government counterpart commitment and a dynamic and supportive financial sector Local ownership is key: client monetary or in-kind contributions; local software solutions and IT support strengthen client ownership and sustainability Position reforms as a transformation of the credit market. Sustain effort with a professional team over time merging local knowledge with global subject-matter expertise.
THANK YOU Alejandro Alvarez de la Campa Global Product Leader, IFC Secured Transactions aalvarez1@ifc.org