- Elgar Financial Law series
Edited by Frederique Dahan and John Simpson
Chapter 4: Firm-level Evidence on Collateral and Access to Finance
4. Firm-level evidence on collateral and access to ﬁnance Mehnaz S. Safavian 4.1 INTRODUCTION Collateral requirements for loan contracts are an important part of ﬁnancial sector contracts: most loan contracts require some type of security or collateral. This is true across the globe, irrespective of a country’s income, growth or ﬁnancial sector development. And yet collateral requirements often preclude businesses from participating in credit contracts: businesses without ‘suﬃcient’ collateral will not be able to access bank ﬁnance for many types of investment loans, and even for short-term working capital lines of credit.1 Conventional wisdom would suggest that these ﬁrms are excluded from ﬁnancial sector contracts because they are asset-poor. But this is not true: most businesses have a wide array of assets at their disposal, assets that in many countries would be considered excellent sources of collateral. In certain countries it is only because the legal framework governing movable property precludes these assets from being used productively in loan contracts: in other words these assets are ‘dead capital’.2 The main objective of the chapter is to build a greater understanding of the role of ﬁrms’ assets in accessing formal ﬁnancial markets. I use data collected on ﬁrms from across the world, and highlight their experience with access to ﬁnancial contracts. I relate these experiences to the level and type of assets these ﬁrms hold. Additionally, I look at the varying impact of 1 In this chapter, I examine only the role of collateral in credit contracts for enterprises, for...
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