SME Finance Policy Guide

84 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION
Figure 8 Strength of legal rights and credit information infrastructure
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
6.7
5.2
4.7
50
40
30
20
10
0
4.1
3.1
1.3
High Income Middle Income Least Developed
Countries
Bars indicate standard deviation across countries
High Income Middle Income Least Developed
Countries
Bars indicate standard deviation across countries
Source: Doing Business
The Enabling Environment
for SME Finance
Two “Doing Business” indices measure differences in
the legal framework and credit reporting systems. The
“Strength of Legal Rights” index measures the degree
to which collateral and bankruptcy laws protect the
rights of borrowers and lenders and thus facilitate
lending by reducing the probability of default or
reducing losses of lenders given default. Effective collateral
regimes contribute to SME finance by reducing
the risks and losses of lenders. The Strength of Legal
Rights index measures the efficiency of collateral law
(Figure 8), and is lower for LDCs. The “Depth of Credit
Information” index measures rules and practices
affecting the coverage, scope, and accessibility of credit
information available through either a public credit
registry or a private credit bureau. Well-functioning
credit information systems reduce adverse selection
and moral hazard, and can contribute to both an
expansion of credit and a reduction in lending costs.
Not surprisingly, as figure 8 shows, LDCs scores are
lower than those in higher-income countries. Figure 8
also shows substantial variation across countries in the
same income groups, particularly in terms of credit
information.
The results are in line with other indicators showing
that LDCs face a more severe set of challenges and constraints
in providing enabling policy guides for SMEs.
Indicators particularly relevant for financial access are
the time taken and cost incurred in registering property
and enforcing contracts. Studies show that countries
with lower entry costs and lower costs of
registering property have a larger SME sector in manufacturing.
99 As shown in Figures 9 and 10, such costs
are higher than average in LDCs. These indicators also
show considerable variation across countries in the
same income groups.
The combination of costly and lengthy registration
and enforcement processes, along with weak legal
rights, acts to constrain SME lending in LDCs. SMEs
are more likely to fail at acquiring new land or buildings
compared to large and medium firms. Difficulties
in acquiring property and securing titles and construction
permits means that firms are less competitive
and less able to expand production and
employment. This can contribute to financing gaps,
not only because such firms have lower asset values
that can be used to secure loan contracts, but also
because they are less productive, rendering them less
creditworthy. Registering and transferring real
99 Ayyagari, Beck and Demirgüç-Kunt (2007)