UNNExT workshop on Paperless trade facilitation for Small .... Pay component _ IFC _ Ms... · Outline • Definition of Secured Transactions • Why is Secured Transactions Important

UNNExT workshop on

Paperless trade facilitation for

Small and Medium-sized Enterprises

2-4 February 2015

United Nations Conference Center (UNCC)

Bangkok, Thailand

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Secured Transactions

& Collateral Registry

Systems - Overview

February 3rd , 2015

Secured Transactions and Movable Collateral

Registries for SME’s

UNNExT Workshop – Paperless Trade

Facilitation

Elaine MacEachern, Global Product Specialist for Secured Transactions &

Collateral Registries

East Asia Pacific

IFC Advisory Services, World Bank Group

February 3rd, 2015

Outline

• Definition of Secured Transactions

• Why is Secured Transactions Important for

SME Finance?

• Key Legal Principles

• Capacity Building

• Global Case Studies

•Viet Nam – Lao - China

Definition – Secured Transactions

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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

VehiclesIndustrial and Agricultural

EquipmentDurable Consumer

GoodsAgricultural Products (crops,

livestock, fish)

Intellectual Property Rights

Accounts Receivable

Definition of Secured TransactionsSecured Transaction & Collateral Registry System

Why WBG Focus

on Secured

Transactions?:

Clear Market

Failure

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1. Why is IFC

Focusing in this

Area?: Clear

Market Failure

SME FINANCE GAP

400 million SMEs in developing world

50% unserved or underserved

14% with loan or line of credit

COLLATERAL GAP

Source: World Bank Enterprise Surveys

Mismatch between assets owned by companies and

collateral required

44%

34%

22%

Vehicles/machinery/equipment

Accounts Receivable

Land / Real Estate

73%

27%

Land / Real Estate Movable property

Capital Stock of Firms Collateral Taken by FIs

Economic Impact of Secured Transactions

• Availability and cost of credit are directly influenced by the

laws affecting secured transactions.

• Empirical studies conducted by WB, IMF, ADB have shown that

one of the most effective means of providing working capital to

commercial enterprise is through secured credit.

• Secured credit can take many forms, accounts receivable

finance, inventory finance, asset based finance , etc.,

• Key to effective secured credit is the ability to allow businesses

to use the value inherent in their assets as a means of reducing

risk for the creditor

• Expectation that a creditor when faced with a default, has the

exclusive right to seize and sell the asset and allocate the

proceeds against the debt ahead of other creditors.

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Key Legal Principles

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12

Effective Secured

Transactions System

Broad Scope

Creation

Publicity / Registration

Priority

Enforcement

5 key Legal PrinciplesBuilding Blocks of a Good Secured Transactions System

� Security rights (possessory and non-possessory) in all types of

movable assets, tangible or intangible, present or future,

including their products and proceeds

•Secured Transactions General Legal Principles

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•PRINCIPLE 1: BROAD SCOPE OF RIGHTS THAT CAN BE CREATED ON ALL TYPES OF MOVABLE ASSETS

44%

34%

22%

Vehicles/machinery/equipment

Accounts Receivable

Land / Real Estate

•Capital Stock of Firms

73%

27%

Land / Real Estate Movable property

•Collateral Taken by FIs

•Secured Transactions General Principles

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•PRINCIPLE 1: BROAD SCOPE OF RIGHTS THAT CAN BE CREATED ON ALL TYPES OF MOVABLE ASSETS (Example)

•Raw materials into finished goods/products and futures goods:

� Fertilizers into crops

� Wool into rugs

•

� All legal and natural persons should be able to create security

rights.


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•PRINCIPLE 1: BROAD SCOPE OF RIGHTS THAT CAN BE CREATED ON ALL TYPES OF MOVABLE ASSETS (Cont’)

•PRACTICAL EXAMPLE: Bangladesh and India - security interests are registered in the company registry so only companies registered can pledge collateral. Sole proprietors are excluded (most of the micro, small enterprises, farmers, etc.) =

80% of private sector

� All property rights created contractually to secure the payment of an obligation, including: transfers of title; assignments of receivables, retention-of-title sales and financial leases (Functional Approach).


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•PRINCIPLE 2: PUBLICITY OF SECURITY INTEREST IN MOVABLE COLLATERAL

•The means of making a claim against movable property transparent

to third parties, commonly provided by registration in a public

registry, by taking possession or control of the movable property.

Main principles:

1. Electronic web-based for real time data

2. Centralized data, notice system

3. Simplicity - information contained limited to what is essential:

creditor, debtor, loan amount, general description of the asset

4. Data and searches accessible to all at real time

5. Reasonable fees

6. Security for data protection

7. Registration and searches based on clear rules


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•PRINCIPLE 2: PUBLICITY OF SECURITY INTEREST IN MOVABLE COLLATERAL (Examples)

1. Real time information on existing security interests on all movable assets

2. 24/7 accessibility to information from any computer

3. Low nominal fees or no fees4. Disaster recovery site5. Online payment (electronic transfer,

credit card, etc)6. Average 200,000 registrations per

year

New Zealand

China Mexico

•On-line Modern Collateral Registries •Weak Collateral Registries

Haiti Senegal Bulgaria

1. Paper based registry for certain types of assets only

2. Access to information very limited and not immediate

3. Very high fees, usually based on percentages, from 1 to 5%

4. No data security5. Cash payments6. Average a few hundred registrations

per year (in Haiti, only 6 registrations)


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•PRINCIPLE 3: PRIORITY OF SECURITY INTERESTS IN MOVABLE COLLATERAL

•Determines the sequence in which competing claims to the same collateral will be satisfied when the debtor defaults on one or more of the claims. Clear policies and no conflict of laws are key. Clear policies based on two main principles:

1. The “first to register rule”, date of registration determines the order of priority

2. Exceptions to this rule require clear policies explaining the rationale for that exception (unsecured claims on taxes and labor wages, PMSI, buyers)


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•PRINCIPLE 3: PRIORITY OF SECURITY INTERESTS IN MOVABLE COLLATERAL (Examples)

•ST LAW: Establishes a new registry for all security interests in movables

•PROBLEM: PREVIOUS LEGISLATION. The Company Law provisions on registration were not repealed by the Secured Transactions Law

•END RESULT: Uncertainty as to where security interests have to be registered as the are two official registries

•BOTH ST LAWS: Allow for pledge of future crops

•REGISTRATION OF SECURITY INTERESTS IN FUTURE CROPS: In the real estate registry (archive)

•PROBLEM: WAREHOUSE RECEIPTS LAWS. Give priority to the receipts for goods stored in a warehouse

•END RESULT: Banks won’t accept future crops as collateral because of uncertainty and risk


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•PRINCIPLE 4: ENFORCEMENT OF SECURITY INTERESTS IN MOVABLE COLLATERAL

•Process for enforcing a claim against movable property when the debtor defaults on the secured obligation. Key principles:

1. Possibility of out of court enforcement if agreed by both parties

2. Fast track processes in court3. Disposition (in private or public sale) of the collateral by

the creditor4. Rights of the debtor during the seizure proceedings

(appeal after seizure, right of redemption, notification of disposition)


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•PRINCIPLE 4: ENFORCEMENT OF SECURITY INTERESTS IN MOVABLE COLLATERAL (Examples)

• Around120 countries

• Takes days, weeks or months to enforce a security interest

COUNTRIES WITH

OUT OF COURT

ENFORCEMENT OF

SECURITY

INTERESTS

• Still 100 countries

• Takes years to enforce a security interest

• Bangladesh, Guatemala, Colombia (4 years +), Angola, Djibouti, Egypt (3 years +), etc

COUNTRIES WITH

ONLY JUDICIAL

ENFORCEMENT OF

SECURITY

INTERESTS

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� UNCITRAL Registry Guide and Legislative Guide on Secured Transactions

� World Bank Principles on Insolvency and Creditors Rights

� IFC Guide on Secured Transactions and Collateral Registries

� OAS Model Law

Internationally Accepted Standards

WHY ARE FINANCIAL INSTITUTIONS NOT WILLING TO LEND TAKING MOVABLE PROPERTY AS COLLATERAL?

Restrictions on types of

assets

Lack of clear creditor

priority

Enforcement issues

Lack of Adequate Legal Framework

Lack of Registry of Security Interests in

Movables

Dysfunctional Registry

No Registry

Lack of publicity

No transparency

Have never done that

type of financing

Do not have the staff

with skills

Lack of Know How on Movable Asset Lending

Not their type of business

No competition in the

lending markets

Revenue from other

sources (TB)

Not Interested

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•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 SMEs and women entrepreneur

- 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

•Financial Infrastructure: the importance of credit information systems and secured transactions

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Credit information systems

reduce information asymmetries, support

efficient credit allocation and strengthen risk management

Secured transactions systems and collateral

registries reduce risk to lenders, facilitate access to credit, and promote credit diversification

•A solid financial infrastructure serves both ACCESS TO FINANCE, REDUCTION OF LENDING COSTS AND RISKS, thanks to the reduction of information asymmetry

Capacity Building

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Movables Financing: Concepts and ApproachesBasic Credit Principles

• Among others, business loan structuring usually needs to

ensure that:� A loan finances an “asset” of the borrowing business

� A loan can be repaid by the cash flows generated from the normal

course of business, including a proper matching of timing

� Security-taking, if any, is consistent with the asset structure of the

borrowing business

• In emerging markets, what is the typical asset structure of

a SME?

• Are their financial statements generally reliable?

• Are businesses inclined to engage in arbitrage behaviors?

Movables Financing: Concepts and ApproachesRole of Movables Financing in Credit Market

Secured Loans

Unsecured

Loans

Movables Loans

Immovables

Secured

Movables &

Immovables

SecuredMixed

AR & Inventory

All Loans Secured Loans Movables Loans

How to Go about It?Movables Financing Innovation in an Economy

How to Go about It?Movables Financing Innovation in a Credit Institution

Case Studies

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EXISTING LITERATURE AND EMPIRICAL EVIDENCE ON THE POTENTIAL IMPACT OF THIS TYPE OF REFORM

� INCREASES ACCESS TO CREDIT: IMF; World Bank; EBRD; ADB; Djankov,

McLiesh,Shleifer (2005); Lago, Lopez, Saurina (2007)

� INCREASES ACCESS TO CREDIT, MITIGATES FINANCIAL RISKS,

PROMOTES PRUDENT LENDING PRACTICES AND REDUCES NPLs:

BASEL. IMF. Stiglitz, Weiss -1981. Steijvers and Voordeckers, 2009

� REDUCES THE COST OF CREDIT: World Bank; Chavez, de la Pena,

Fleisig (2004); Lago, Lopez, Saurina (2007)

� LEGAL SYSTEM , AVAILABILITY AND COST OF CREDIT: La Porta et al

(1998), Demirguc-Kunt and Maksimovic (1998), Djankov et al. (2007),

Qian and Strahan (2007), Haselmann et al. (2010).

Case Study: Lao Xao Group

• Successful - 8 year old Lao PDR based business – Food Industry

• Women owned with 10- 12 employees

• Broad range of movable assets

• Contract from Airline

• Would she be eligible for “Purchase Order Finance” ???

• Lao Registry of Security Interest in Movable Property

• www.mof.gov.la/str

• Video Link :

https://www.youtube.com/results?search_query=lao+secured+t

ransactions+registry

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� 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

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CHINA

RESULTS

MORE THAN US$ 4 TRILLION IN FINANCING

MORE THAN 100,000 BENEFICIARIES SMEs

600,000 + REGISTRATIONS

CHINA: 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 China by Dalberg

44%

42%

52%

60%

69%

45%

57%

13%

8%

8%

28%

18% 6%

0%

0%

0%

•100%•0%

•23%

Serve SME clients from new industry sectors

Gain better information about SME clients

•18%

Reduce the cost of capital to SME clients •40%

Offer existing SME clients new types of lending products

Attract new SME clients •23%

•4%

•36%

•44%

Increase access to finance for enterprises of all sizes

Serve new segments of SMEs

•52%

•4%

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

Shanghai, Zhejiang, Beijing

Not Very ImportantVery Important Somewhat Important Not At All

•4%

� REDUCES THE GAP OF THE “UNDERSERVED SME SEGMENT”: more than 80% of FIs confirmed that they started serving new segments and attracted new clients

� REDUCES THE COST OF CREDIT: 92% of FIs confirmed that it helps to reduce the cost of capital to SME clients


38Source: 126 enterprises surveyed in Beijing, Chengdu, Hangzhou, Wuhan and Zhengzhou, out of which 100 are SMEs.

6

21

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88

Others

Growth in employees

Growth in client base

Growth in business

Benefits of financing obtained for SMEs

business

Majority of enterprises think that their businesses would be

impacted if they had not obtained financing using A/R

• 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.

� 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


• In Vietnam, legal reform and new centralized online registry (March 2012)

• Over 290,000 loans have been registered to more than 150,000 SMEs

• Total volume of financing through the registry is US$ 8 billion

• In China, 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 Colombia new Secured Transactions Law in 2013 and new centralized collateral registry in March 2014

• In 10 months more loans registered than in the last 30 years. More than 800,000 loans registered for a value of US$69 billion

RESULTS OF CREDIT COLLATERAL REGISTRY PROJECTS IN OTHER REGIONS

5. Reform Challenges

and Lessons Learned

Medium/long term reform that will not see immediate impact.

Reforms take on average 4-5 years. Passing of laws, political

instability major sources of delay

COLLATERAL REGISTRIES LESSONS LEARNED & BEST PRACTICES

IFC Lessons Learned

1

Position the reforms as the “transformation of the credit market”2

Sustain a long-term effort with a professional team over time merging local knowledge with global subject-matter expertise.

3

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Partner with a strong institution with strong political clout(Central Banks). Build consensus among stakeholders

COLLATERAL REGISTRIES LESSONS LEARNED & BEST PRACTICES

Client Best Practices

1

Commitment is critical from both public and private sector: 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 local IT support for the registry

strengthen client ownership and sustainability of the project

3

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Elaine MacEachern

Global Product Specialist, IFC Secured Transactions & Collateral Registry Program

[email protected]

THANK YOU

Documents

UNNExT workshop on Paperless trade facilitation for Small .... Pay component _ IFC _ Ms... · Outline • Definition of Secured Transactions • Why is Secured Transactions Important