Monitoring and evaluating the reform
| Pages | 85-92 |
Page 85
Measuring results is a key part of secured transactions reform, for several reasons. First, all the important effects of the reform on lending terms and volumes should be readily measurable. Second, allocating donor resources effectively requires knowing what works. And third, measurement supports and focuses the dialogue with stakeholders. When everyone knows that results, not doctrinal purity, will be the measure of success, it becomes easier to tally the cost of compromise and to manage that cost.
In principle, determining the success of a secured transactions reform is straightforward: Can property be used as collateral, and does that use lead to better loan terms for borrowers? The success of a reform can also be measured in the economic gain it produces.
The economic gain from the new system comes from larger volumes of credit and lower interest rates. Figure 6.1 shows a stylized version of this gain. Before the reform, lenders offer different amounts of credit at different interest rates. They offer mortgages at rate r-1 up to an amount that can be no greater than 80 percent of the value of land and buildings. They offer loans secured by automobiles at rate r-2 up to an amount that cannot exceed about 90 percent of the value of the stock of automobiles. Finally, they offer unsecured loans at rate r-3, with the total amount of credit constrained by the features of the loan market discussed in previous chapters. Borrowers can invest these funds at the rates of return shown by the curve for the marginal product of capital (MPK); derived from the country's production function, this curve shows the return to investors from additional units of capital. Thus the vertical distance between the borrowing rate and the MPK is the net profit of borrowers, the economic gain from the (unreformed) system.
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[ FIGURE ARE NOT INCLUDED ]
After the reform, both the amount of credit secured by movable property and the total amount of credit rise. Lending secured by movable property rises from "movable-1" to "movable-2" at interest rate r-2. Total credit rises from K-1 to K-2.
Borrowers now get the difference between the return on capital (MPK) and the interest rate r-2 on a larger amount of credit, increasing their total gain from the (now reformed) system. The analysis assumes, for the sake of simplicity, that neither the mortgage nor the unsecured lending regime changes. The gain from the reform is the difference between the total gain from the system less the gain from the unreformed system (shown in white). That equals the shaded area. As a rough approximation, the gain equals the increase in the volume of secured credit times the difference in interest rates between unsecured loans and loans secured by movable property. A closer approximation is the difference between the MPK and the lending rate secured by movable property times the increase in lending secured by movable property. That measure would require some information about the production function.1
For some purposes (such as project evaluation) the absolute gain will be the relevant measure; for others (such as cross-country comparisons) the gain should be standardized by GDP or total credit outstanding. The measure of gain can also serve as an indicator of the efficiency of the system, allowing Page 87
Table 6.1 DATA REQUIREMENTS FOR MEASURING IMPACT OF REFORM
| . | Loans secured by real estate | Loans secured by new vehicles | Loans secured by used vehicles | Unsecured loans | ||||
| Indicator | Before reform | After reform | Before reform | After reform | Before reform | After reform | Before reform | After reform |
| Volume of credit | . | . | . | . | . | . | . | . |
| Ratio of loan to property value | . | . | . | . | . | . | . | . |
| Interest rate | . | . | . | . | . | . | . | . |
| Limit on loan size | . | . | . | . | . | . | . | . |
comparison of the actual situation with postreform potential. The worst system would have the largest...
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