DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

30 Doing Business 2009mies the repayment rate can increaseby up to 80% when a credit registrystarts operation. Small firms benefit themost: in transition economies that introducednew credit registries, their accessto credit grew twice as fast as that oflarge firms. 4Strengthening the legal rights ofborrowers and lenders allows businessesto invest more in new technologies. Onerecent study finds that economies thatscore higher on creditor protections havenewer airplanes. 5 Beyond that, their airlinesinvest in better safety and communicationtechnologies. Why? Part of thereason is that where strong protectionsare lacking, creditors offer only leasing,not loans. So in economies with weakcreditor protections, most planes areleased, and airline owners have less incentiveto upgrade their safety features.New evidence suggests that establishingstrong legal rights and new creditregistries may also reduce income inequality.6 One possible explanation isthat these changes allow more entrepreneursto expand their business. Borrowingmoney from the bank becomes moreabout their creditworthiness—and lessabout whom they know.Who reformed in 2007/08?Cambodia’s new secured transactions lawmade it the top reformer in getting creditin 2007/08. Albania was the runner-upreformer. It created a new public creditregistry with full information on loans ofall sizes, for individuals and for firms.Before the new law took effect inCambodia, business owners could useonly immovable property as collateral.With little land under private ownership,getting a loan was an unreachabledream for most small to medium-sizebusinesses. The new law changed that.Cambodian entrepreneurs can now use abroad range of movable assets to securea loan. That includes revolving assetssuch as inventory and accounts receivable.A general description of collateralsuffices in loan agreements, permittingsuch wording as “all assets” or “all movableproperty” of the borrower. Thanksto these and other provisions of the law,Cambodia’s score on the strength of legalrights index shot up from 0 to 9.Three other economies in East Asiaand Pacific—Vanuatu, China and Taiwan(China)—also made it easier forbusinesses to use movable property asTable 6.2More credit information, more access—popular reform features in 2007/08Provided online access to credit registryExpanded set of information collected incredit registryIntroduced regulations guaranteeingthat borrowers can inspect data in credit registryEstablished new credit registry or bureauExpanded range of revolving movable assetsthat can be used as collateralAllowed out-of-court enforcement of collateralAllowed maximum rather than specific amountsin debt agreementsGave priority to secured creditors’ claimsoutside and inside bankruptcy proceduresExempted secured creditors’ claims froman automatic stay in reorganizationCreated a unified registry for movable propertySource: Doing Business database.Cameroon, Central African Republic, Chad, Republicof Congo, Equatorial Guinea, Gabon, Sri Lanka,West Bank and GazaAzerbaijan, Belarus, Georgia, Kazakhstan, Mauritius,Sri Lanka, Tunisia, VietnamBelarus, Egypt, Georgia, Indonesia, former YugoslavRepublic of Macedonia, Morocco, TunisiaAlbania, Liberia, Montenegro, Ukraine, United ArabEmirates, UzbekistanCambodia, China, Guatemala, VanuatuGeorgia, Guatemala, VanuatuCambodia, Taiwan (China)Cambodia, VanuatuCambodia, Sri LankaCambodiacollateral. Vanuatu passed a new securedtransactions law, the Personal PropertySecurities Act. China revised its propertylaw to allow borrowers to use a varietyof revolving assets and a combined setof assets (such as raw material, productionequipment and finished goods) ascollateral. The new law is expected toput into circulation more than $2 trillionworth of movable assets. 7 Taiwan (China)amended its civil code to allow partiesto a pledge agreement to set the loanamount as a maximum line of credit.In South Asia, Sri Lanka exemptedsecured creditors from automatic suspensionof enforcement procedures incourt during bankruptcy.Georgia amended its civil code inJune 2007 to allow parties to agree thatcollateral can be sold without court intervention.Guatemala passed a law inOctober 2007 establishing a special regimefor registering security interestsin movable property. The law went intoeffect in January 2008.Twenty-seven economies reformedtheir credit information systems in2007/08, improving the quality and scopeof information collected and distributedby credit registries and bureaus (table6.2). Uzbekistan created both a publiccredit registry and a private credit bureau.Albania, Liberia and Montenegrolaunched new public credit registries—and in Montenegro the coverage of borrowerswent from 0 to 26% of the adultpopulation. Ukraine and the United ArabEmirates each set up a private credit bureau.Zambia is doing so.Six more economies in Eastern Europeand Central Asia introduced creditinformation reforms, bringing the totalto 10, the most of any region. Georgianow distributes a full range of information,including on-time repaymentpatterns and outstanding loan amounts.Coverage has increased 20 times. Kazakhstan’sprivate credit bureau is addingnew suppliers of information at a rate of2 a month. Prominent among them arenonbank institutions such as retailersand utility companies. Coverage has shotup by 80%. Moldova passed a new law to(c) The International Bank for Reconstruction and Development / The World Bank