Business Removing

44 DOING BUSINESS IN 2005
FIGURE 6.3
High costs to create collateral in Africa
Cost to create and register a collateral agreement
Percentage of income per capita
39 Sub-Saharan Africa
22 Middle East & North Africa
20 Latin America & the Caribbean
7 Europe & Central Asia
6 South Asia
5 OECD high income
3 East Asia & the Pacific
Source: Doing Business database.
22 Poor
10 Middle income
5 Rich
main asset, accounts receivable, requires the notification
and consent of all the debtors.
After the type of security and debt is agreed, a lender
wants to check for existing rights to the collateral and
alert others of its priority. The best way is with a collateral
registry. Most countries have some type of registry—for
security over land, vessels, aircraft and intellectual
property. And in most an agreement is binding
over third parties only if it is registered. But only 30 have
registries that allow registration of charges of all types of
movable property, as well as link the registry across regions,
to make it easy to retrieve information.
Creating and registering movable collateral is easy
in many countries. In Botswana, Canada, Kuwait, the
Netherlands, New Zealand, the United Kingdom and the
United States, fees, taxes and stamp duties are negligible,
and registration is complete in 1 or 2 days. But in others,
costs in a standardized case of creating security add up to
50% of income per capita or more (figure 6.3, table 6.2). 5
Most countries register charges within 2 weeks. But
it takes more than a month in Azerbaijan, Ghana, Honduras,
India, Mexico, Nicaragua, Paraguay and South
Africa. In Poland registration takes place in the court,
where a judge must certify the legality of the agreement.
The process can take 6 months. In the meantime, a
fraudulent borrower could pledge the asset to another
creditor. And the main business of courts—resolving
disputes—is held up.
Costs to create collateral are highest in poor countries
and lowest in Asian and OECD countries. Countries
with no registries are cheaper. But the creditors lose
out elsewhere because they have no way of notifying
others of their right to the collateral.
Collateral registration is only part of the story. Laws
on who has priority to the collateral introduce another
set of risks. In India the creditor can lose out to unpaid
taxes, to someone who bought the collateral in good
faith or to judgment creditors. 6 India is not alone. Sixty
countries give priority to a claimant other than the secured
creditor. The uncertainty means higher interest
rates and less credit for borrowers.
In Brazil credit can be secured by movable collateral,
but only at high cost and with a painstakingly specific
description in the loan agreement. If the debtor defaults,
an even bigger obstacle arises. Creditors must file a claim
with the court. Long proceedings ensue before the judge
decides to enforce and orders bailiffs to seize the assets.
After appraisal, a public auction is scheduled and advertised.
The court determines a minimum price. If met,
sale proceeds are deposited in a public agency and distributed
through settlement procedures. Debtors have
unlimited opportunities to drag the process by appeal.
Enforcement takes more than 7 years.
In another 40 countries enforcing collateral requires
the same long court trial as for unsecured debt. Prospects
for recovery are dim. Lenders respond with huge collateral
requirements and high interest rates. In Zambia average
collateral requirements are more than 3 times the
value of the loan and interest rates top 28%. 7 Few can afford
such terms. Compare this with Australia. The creditor
would appoint a receiver and serve notice on the borrower.
The receiver would seize and sell the asset. No
courts are involved, as long as the debtor cooperates. Enforcement
is over in 10 days. In Latvia, even if the debtor
does not cooperate with out-of-court measures, enforce-
TABLE 6.2
The least expensive to create collateral—and the
most
Cost to create and register security, % income per capita
Top 10 Bottom 10
New Zealand 0.02 Egypt, Arab Rep. 52.7
Netherlands 0.03 Jordan 56.3
Canada 0.05 Mali 58.5
Kuwait 0.06 Morocco 62.2
United Kingdom 0.07 Niger 74.6
Puerto Rico 0.09 Benin 80.7
United States 0.14 Togo 83.4
Hong Kong, China 0.18 Cameroon 87.6
Taiwan, China 0.20 Congo, Dem. Rep. 130.0
Albania 0.25 Côte d’Ivoire 155.9
Note: Austria, Cambodia, Germany, Saudi Arabia and Switzerland have no cost but
also no collateral registry.
Source: Doing Business database.