2.3.8. Establish Legal and Procedural Foundation for Secured Transaction Regimes
Legal reform to enable modern secured transactions increases the availability of credit and reduces its cost by codifying the provisions that ensure that lenders can collect debt and enforce their rights in collateral. USAID has supported numerous countries in establishing secured transaction regimes. Reforms include clarifying the lender’s rights against the collateral with respect to the borrower and third parties, simplifying the process of granting secured credit, and providing procedural mechanisms for simple publication and effective enforcement of these rights.
Secured transaction reform may include regulation that allows for the pledging of movable property rather than just real estate as property. Allowing movable property to be used as collateral allows for more flexible loan products and for finance to reach those who may not own land or other assets, often women.
- Ability for finance providers to legally enforce collateral rights and collect debts
- Ability to file/record a security interest on real estate (land and buildings) pledged as collateral
- Transaction costs associated with originating and managing loans to target sector/region
- For reforms that include provisions for movable property lending, ability to file/record a security interest on moveable property pledged as collateral
Secured financing reform reduces risk and creates more flexibility in the collateral used for financial transactions. A sound system prevents conflict between property claimants and allows providers to better calculate and reduce the risks of lending, thereby lowering costs and increasing availability of credit. Allowing different forms of collateral enables a broader range of finance seekers to participate in the financial system.
- Countries with strong civil law tradition can be difficult to reform
- Political instability and challenging security situations can also impact the speed and simplicity of reform
- Even if provisions for movable property lending are included in secure transaction reform, finance providers may not be willing to use this form of lending without significant sensitization
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
Prior to engaging in secured financing reform, donors should consider completing a diagnostic to collect baseline data on secured and unsecured lending, assess the legal and institutional framework, and consider how reforms should align with the institutional context. Organizing support from business associations and finance providers can speed government engagement.
VIGNETTE: SECURED TRANSACTION REFORM IN BOSNIA AND HERZEGOVINA
In Bosnia and Herzegovina, the country’s legal tradition in commercial law did not recognize modern concepts of secured financing law. For example, the use of future property as security for credit and modern priorities schemes were foreign to the legal system.
USAID facilitated the reform of several aspects of Bosnia and Herzegovina’s legal system. The most challenging part of the reform was to create unified secured financing legislation for the whole country. This required an exception to the constitutional division of power provisions between sub-national units. Moreover, a unified legal system required revocation of earlier laws enacted with the support of the international community, essentially reversing earlier reforms. Finally, the proposed secured financing regime had to accommodate Bosnia and Herzegovina’s civil law tradition without sacrificing its efficacy.