Introduction

• Pages: IX-XI

Contenidos

• What the book aims to do.
• How the world bank has supported reform.

Most readers, especially those with a car loan or home mortgage, are familiar with the concept of collateral-property that a borrower pledges and that the lender can lawfully take away if the borrower defaults on the loan. Collateralized, or secured, loans are the most common lending contract in the formal financial sector, in developing and industrial countries alike. This makes sense from a lender's perspective: loan contracts can be more easily enforced when secured by collateral.

Loans secured by collateral are part of a broader set of secured transactions-transactions in which the parties agree to secure an obligation with an enforceable security interest in property. Besides a lender, the party accepting the security of collateral could be a business selling goods on credit or any other party needing a guarantee-such as a government contracting agency seeking a performance bond from a road construction firm. All these transactions are governed by a legal system that can dictate many things: how a security interest is created, who may create it, who has priority in receiving the proceeds from sale of the collateral, how security interests are made public, what rights other parties have in the property offered as collateral, how the property is repossessed in the event of default, how it is sold, and how the proceeds are used to satisfy the claim of the party who has the security interest in the property.¹

Why a book on reforming the legal systems governing collateral-the laws of secured transactions, the archives for filing security interests, and the systems for enforcement? Because in countries that have not reformed these legal systems, most of the assets that firms hold cannot be used to secure loan contracts. These assets become "dead capital."²

Contrary to common belief, it is not insufficient assets that prevent firms in low-and middle-income countries from accessing finance. Indeed, firms have a wide array of assets that could easily be used to secure loans-movable assets from goods and machinery to accounts receivable and warehouse receipts. Unreformed legal systems limit the use of such assets as collateral and therefore limit access to credit by leading to both higher interest rates and smaller loan volumes. That means lower investment and slower economic growth.

What the book aims to do

This book on reforming the legal systems governing...