Commercial Legal And Institutional Reform (CLIR) - Economic Growth

COMMERCIAL LEGAL AND INSTITUTIONAL REFORM
Diagnostic Assessment Report for the Republic of Bulgaria March 2002
B. COLLATERAL LAW
OVERVIEW
A healthy system of secured lending depends upon three elements: an appropriate legal
regime, an effective registry, and reliable enforcement. Only two of these elements are
present in Bulgaria. Weaknesses in the system of enforcement are producing serious
negative consequences for the growth of the credit industry and the cost and availability
of credit. Addressing the problem will require a broad-based approach focused on both
legal and institutional weaknesses.
The legal regime for collateral law in Bulgaria is essentially sound. The basic law is
modern and sophisticated and theoretically permits most types of secured transactions.
Although some refinements are needed, the existing laws provide the necessary
foundation for the growth of secured credit. Likewise, the Special Pledge Registry is
effectively meeting most needs of users at this time. The registry is computerized,
functions rapidly, and enjoys excellent reviews from users. The only significant
shortcoming of the registry is the lack of a centralized database via Internet or intranet to
permit simultaneous computerized searches of all records, but this can be remedied easily
at relatively low cost. In short, no significant changes are required in the principal
framework laws or registry in the near term.
Despite these positive findings, development of collateral lending continues to be
adversely affected by the lack of efficient and predictable enforcement mechanisms.
Users, banks, and practitioners complained unanimously about the costs, delays, and lack
of predictability in the enforcement system. Some changes are under way, with proposals
for changes in the civil code being developed by industry groups and legal professionals.
Even these changes, if adopted, will be stymied by the dysfunctional bailiff system. Selfhelp
is improving as an option but is not viable overall. Thus repossession is difficult,
costly, and uncertain.
In short, secured lending has the right framework in place, but the breakdown in
enforcement is constraining the availability of credit while driving up costs.
LEGAL FRAMEWORK
The principal legislative framework for secured lending is set forth in the Law on Special
Pledges, adopted in 1996, and entered into force on April 1st, 1997. The law establishes
a modern, well-conceived foundation for the development and implementation of a
secured lending regime with well-defined priorities and protections based on public
notice through registration. Although refinements are needed in some areas, no major
reforms are required.
The Law on Special Pledges provides for ample forms of possessory, retained title, and
nonpossessory pledges. These include special pledges on accounts receivable, shares,
warehouse receipts, livestock, and an enterprise as a going concern. The overall
framework does not yet adequately provide, however, for securitization or
Booz Allen Hamilton
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