Secured Transactions Reform and Access to Credit
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Secured Transactions Reform and Access to Credit

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.
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Chapter 4: Firm-level Evidence on Collateral and Access to Finance

Mehnaz S. Safavian


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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