Business Removing

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GETTING CREDIT 45 ment only takes two months through a simple summary procedure with limits on frivolous appeals. Collateral laws are of less use when debtors with multiple creditors default—or when the best way to recover debt is to reorganize an insolvent business. Bankruptcy laws come in. They define who controls the process, who has rights to the debtor’s assets, and the efficiency of realizing these rights. It is natural to anticipate more lending if creditors expect to be treated fairly in a bankruptcy case, and the rights of secured lenders in bankruptcy law have been shown to expand credit. 8 Three of these rights are most important: • A secured creditor may enforce on its collateral when a debtor enters reorganization—so the assets are not “stayed.” • The secured creditor is the first to be paid out of the proceeds from liquidation. • The creditors or an administrator manage the business during reorganization, rather than the bankrupt debtor himself. Increasing these rights means changing bankruptcy laws—a difficult reform. In 2003 only two countries improved on these indicators. 9 In Poland employees and taxes previously were paid before the secured creditors upon liquidation. Now, secured creditors have priority to the proceeds from the sale of their collateral (if there is a shortfall, employee claims rank ahead). In Armenia, since March 2004, the debtor automatically loses control of its property to an administrator on bankruptcy, increasing creditor rights. Some others, such as Spain, introduced reforms that affected creditor rights but did not change the net score. To measure the ease of getting credit, a new index on how well collateral and bankruptcy laws facilitate lending includes the 3 measures of legal rights in bankruptcy and 7 measures of collateral law: general rather than specific descriptions of assets are permitted (expanding the scope of assets covered); general rather than specific descriptions of debt are permitted (expanding the scope of debt covered); any legal or natural person may grant or take security over business credits; a unified registry including charges over movable property operates; security provides priority outside bankruptcy; parties may agree on TABLE 6.3 The most legal rights for borrowers and lenders— and the least Top 10 Bottom 10 United Kingdom 10 Brazil 2 Hong Kong, China 10 China 2 Singapore 10 Morocco 2 Albania 9 Peru 2 Australia 9 Haiti 2 Botswana 9 Lao PDR 2 Netherlands 9 Yemen, Rep. 2 New Zealand 9 Turkey 1 Slovakia 9 Greece 1 Latvia 8 Egypt, Arab Rep. 0 Source: Doing Business database. enforcement procedures by contract; and creditors may both seize and sell collateral out of court. Nine countries have more than 9 of these features. A dozen have 2 or fewer (table 6.3). OECD countries score the highest (figure 6.4). Transition countries follow, reflecting the sweeping collateral law reforms in almost every country in the last decade, supported among others by the European Bank for Reconstruction and Development. 10 Poor and middle income countries score much lower than rich countries. Some, such as the Dominican Republic, have laws on collateral from the 19th century—hardly relevant to today’s financing needs. Others score poorly even after reforms—such as the OHADA countries in West Africa. Their 1998 improvements did not go far enough. The Middle East and North Africa and Latin America vie for the region with the weakest legal rights. FIGURE 6.4 OECD countries—most rights for borrowers and lenders Legal rights index GREATER SECURITY 6.3 OECD high income 5.4 Europe & Central Asia 5.2 East Asia & the Pacific 5.0 Sub-Saharan Africa 4.0 South Asia 3.8 Middle East & North Africa 3.9 Latin America & the Caribbean 6.3 Rich 4.9 Middle income 4.5 Poor Source: Doing Business database.
46 DOING BUSINESS IN 2005 What to reform? In an attempt to improve credit markets in the 1990s, many developing countries introduced procedures for reorganizing bankrupt companies, along the lines of Chapter 11 in the United States. The procedures are almost never used. A better approach is to improve credit information systems and legal rights. Doing Business in 2004 recommended regulations or codes of conduct to encourage lenders to participate in private bureaus. It also discussed how public registries can complement or, in some cases, help compensate for a lack of private information sharing. And it explored ways to improve debt recovery in bankruptcy, including giving clear and predictable priority to secured creditors. Six other reforms expand access to credit: • Distributing both positive and negative information. • Expanding providers of data to the credit registry. • Making credit registries electronic. • Introducing universal security for debtors and creditors. • Establishing registries for all security interests in movables. • Permitting out of court collateral enforcement. Distribute positive and negative credit information The more information a registry provides to help predict defaults, the more useful it is to lenders, and the more credit available (figure 6.5). 11 Seventeen countries distribute only a limited range of positive data, all through public registries. Australia, Denmark, Estonia, Ghana, New Zealand and the Philippines distribute only negative data. 12 Why not permit both? The excuse is usually FIGURE 6.5 Broader information and electronic access—more credit Increase in private credit to GDP associated with: Percentage points 12.6 Both positive and negative information are shared 12.0 Retailers, trade creditors and/or utilities also submit data 10.8 Access is electronic Note: Analysis controls for income, GDP growth, enforcement, and legal rights. Relationships are significant at the 10% level. Source: Doing Business database. privacy. But consumer protection laws can allow sharing of both while safeguarding privacy. In 2003 Greece permitted sharing positive data but with stricter requirements for consumer consent before it can be accessed, enabling the borrower to opt out of the system if desired. Brazil, Hong Kong (China) and Turkey did the same. Borrowers have the right to access their own credit reports and a clear mechanism to challenge errors. Expand providers Expanding the sources of data also works. Trade creditors, retailers and utilities have a wealth of information on payment histories. Sharing it increases the power to predict default and expands credit (figure 6.5). 13 Some 85% of private bureaus use data from retailers and utilities, but only 35% of bank-owned bureaus do. And with the exception of Belgium, all public registries gather data only from supervised financial institutions. Banking laws are sometimes a restriction to sharing data from non-bank creditors, as in Poland. The Czech bureau is awaiting a revision to the Personal Data Protection Act to include information from nonbanking sources. The Turkish bureau will do so by the end of 2004. Make the registry electronic An easy way to improve credit registries, without changing laws or negotiating with lenders to submit more data: provide online access. The new online system in Pakistan cost $500,000 to set up. It delivers reports to lenders instantly. Compare that with a bank in Cameroon, which must wait up to 3 months before getting a written report in the mail. Creditors in 24 other countries cannot access data electronically. With technology so cheap, there is no reason to wait. Providing online access is associated with more credit (figure 6.5). And it may help spur commercial banks to adopt credit scoring technology, which both speeds the lending process and reduces opportunity for gender bias. 14 Introduce universal security for debtors and creditors As a part of its collateral law reform in 2002, Slovakia permitted debtors to use all movable assets as collateral—present and future, tangible and intangible— abolishing the requirement for specific descriptions of assets and debt. Since then more than 70% of all new business credit is secured by movables and receivables. Credit to the private sector increased by 10%. Borrowers in all countries can pledge land or land use rights. All can pledge tangible movable assets without
Page 2 and 3: Doing Business in 2005 Removing Obs
Page 4: Contents Doing Business in 2005 is
Page 7 and 8: 2 DOING BUSINESS IN 2005 FIGURE 1.1
Page 9 and 10: 4 DOING BUSINESS IN 2005 FIGURE 1.4
Page 11 and 12: 6 DOING BUSINESS IN 2005 TABLE 1.3
Page 13 and 14: 8 DOING BUSINESS IN 2005 Notes 1. P
Page 15 and 16: 10 DOING BUSINESS IN 2005 eration w
Page 17 and 18: 12 DOING BUSINESS IN 2005 Based on
Page 19 and 20: 14 DOING BUSINESS IN 2005 FIGURE 2.
Page 22 and 23: 17 Starting a business Who is refor
Page 24 and 25: STARTING A BUSINESS 19 BOX 3.1 Who
Page 26 and 27: FIGURE 3.4 “More difficult” can
Page 28 and 29: STARTING A BUSINESS 23 Introduce te
Page 30 and 31: HIRING AND FIRING WORKERS 25 Hiring
Page 32 and 33: HIRING AND FIRING WORKERS 27 TABLE
Page 34 and 35: HIRING AND FIRING WORKERS 29 FIGURE
Page 36 and 37: HIRING AND FIRING WORKERS 31 FIGURE
Page 38 and 39: 33 Registering property Who makes r
Page 40 and 41: REGISTERING PROPERTY 35 BOX 5.1 Who
Page 42 and 43: REGISTERING PROPERTY 37 FIGURE 5.4
Page 44 and 45: REGISTERING PROPERTY 39 Others are
Page 46 and 47: 41 Getting credit Who is increasing
Page 48 and 49: GETTING CREDIT 43 TABLE 6.1 Coverag
Page 52 and 53: GETTING CREDIT 47 losing possession
Page 54 and 55: 49 Protecting investors Who uses eq
Page 56 and 57: PROTECTING INVESTORS 51 FIGURE 7.1
Page 58 and 59: PROTECTING INVESTORS 53 FIGURE 7.4
Page 60 and 61: PROTECTING INVESTORS 55 national in
Page 62: PROTECTING INVESTORS 57 With langui
Page 67 and 68: 62 DOING BUSINESS IN 2005 In Lithua
Page 71 and 72: 66 DOING BUSINESS IN 2005 enforceme
Page 73 and 74: 68 DOING BUSINESS IN 2005 tion and
Page 75 and 76: 70 DOING BUSINESS IN 2005 Japan hav
Page 77 and 78: 72 DOING BUSINESS IN 2005 Provide s
Page 80 and 81: 75 References Acemoglu, Daron. 2003
Page 82 and 83: REFERENCES 77 ———. forthcomin
Page 84 and 85: 79 Data notes Economy characteristi
Page 86 and 87: DATA NOTES 81 Cost measure The text
Page 88 and 89: DATA NOTES 83 Assumptions about the
Page 90 and 91: DATA NOTES 85 such as government or
Page 92: DATA NOTES 87 Assumptions about the
Page 95 and 96: 90 DOING BUSINESS IN 2005 Starting
Page 97 and 98: 92 DOING BUSINESS IN 2005 Registeri
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96 DOING BUSINESS IN 2005 Protectin
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98 DOING BUSINESS IN 2005 ALBANIA G
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100 DOING BUSINESS IN 2005 BANGLADE
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102 DOING BUSINESS IN 2005 BRAZIL G
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104 DOING BUSINESS IN 2005 CHAD GNI
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106 DOING BUSINESS IN 2005 CROATIA
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108 DOING BUSINESS IN 2005 ETHIOPIA
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110 DOING BUSINESS IN 2005 GUINEA G
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112 DOING BUSINESS IN 2005 IRELAND
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114 DOING BUSINESS IN 2005 KOREA, R
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116 DOING BUSINESS IN 2005 MACEDONI
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118 DOING BUSINESS IN 2005 MONGOLIA
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120 DOING BUSINESS IN 2005 NIGER GN
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122 DOING BUSINESS IN 2005 PERU GNI
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124 DOING BUSINESS IN 2005 SAUDI AR
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126 DOING BUSINESS IN 2005 SPAIN GN
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128 DOING BUSINESS IN 2005 TOGO GNI
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130 DOING BUSINESS IN 2005 URUGUAY
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ACKNOWLEDGMENTS 133 Acknowledgments
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ACKNOWLEDGMENTS 135 Angela Zaffalon
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ACKNOWLEDGMENTS 137 Nolan Stringfie
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ACKNOWLEDGMENTS 139 Thomas Bang LVP
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ACKNOWLEDGMENTS 141 Günter Schneid
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ACKNOWLEDGMENTS 143 Gavin Doherty E
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ACKNOWLEDGMENTS 145 Indrikis Liepa
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ACKNOWLEDGMENTS 147 Phillip Mwangal
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ACKNOWLEDGMENTS 149 Nestor Espenill
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ACKNOWLEDGMENTS 151 Beng Hong Ong W
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ACKNOWLEDGMENTS 153 Leopold Thomas
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ACKNOWLEDGMENTS 155 Marcela Hughes
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