Secured Transactions Reform and Access to Credit

Secured Transactions Reform and Access to Credit

Elgar Financial Law series

Edited by Frederique Dahan and John Simpson

The chapters presented here provide, for the first time, a comprehensive and cutting-edge view of the subject – from both a legal and economic perspective. They start at the macro level of financial systems, moving towards the behaviours of lenders (commercial banks and micro-lenders), policy options for government and the mechanisms of collateral law reform.

Chapter 3: The Economics of Collateral and of Collateral Reform

Heywood Fleisig

Subjects: economics and finance, financial economics and regulation, law - academic, finance and banking law


Heywood Fleisig Developing countries face daunting problems in funding the investment they need for growth. Private funding, domestic and foreign, will play the most important roles. Donor funding will supply a small fraction of these needs. These savings alone, though, cannot guarantee that domestic investment opportunities will be funded. Rather, funding investment successfully also requires a financial sector – bank and non-bank – that mobilizes these savings and delivers them to the highest return domestic investment opportunities. If industrial country experience is a guide, the most important funding instrument will be lending, not capital market equity. In mobilizing loans and directing them to their most efficient use, secured transactions play an important part. The importance of collateral arises from how well it addresses key features and risks in financial markets. Financing movable property is essential to growth, as it amounts to more than half of the enterprise capital stock (see Figure 3.5 below). Obsolete laws and legal institutions, however, sharply restrict the use of movable property as collateral for loans. The remedy lies in reforming the laws and institutions that govern using property as collateral for loans. This reform costs little and delivers large benefits. Therefore, a simple economic model of social change that imagines governments and donors gravitating toward reforms with large net benefits would predict its wide acceptance. This has not happened. While the reform has progressed slowly over the past 15 years, many factors continue to impede its adoption. The outlook is for continued slow progress,...

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