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Bringing More Dead Capital to Life
This paper highlights that banks are more likely to lend – and at better rates – when a borrower can offer collateral to secure the loan. Lenders may provide unsecured credit to some borrowers, but the amounts are less and the costs are higher than for secured loans. As the paper notes, this can be particularly true outside the urban centres, where seasonal production cycles and cyclical cash flow require flexibility in structuring credit. When borrowers can offer valuable collateral, lenders provide more and better rural and agricultural credit.
Worldwide, the best known and most utilised form of collateral is real property – land and the buildings on it. Unfortunately, many people in developing countries do not own real property, or not in a manner that banks recognize as acceptable collateral. Farmers often own land, but even if they have titles, they may be understandably hesitant to risk their newly titled holdings to secure loans. Others may only rent or hold customary rights, which are generally not accepted as collateral. More options are needed to expand access to secured lending in the agricultural sector.
This paper draws attention to the various types of property that can be used as collateral. Movable and intangible property can serve as collateral and broaden the secured lending options for both borrowers and lenders.2 Tangible movable property such as cars, tractors, farming equipment, inventory, crops, cows and a host of other items are valuable forms of collateral in some countries. Intangible property – accounts receivable, trademarks, leases, future harvests and even rights in these rights (derivatives) – can also serve as collateral and enable producers to meet financing needs. These various forms of property can be used effectively for secured lending, however, only if the legal system permits their use as collateral.
In much of developing world, movable and intangible property is overlooked. This note explores the rationale for moveable property registries and how these systems work to broaden access to credit.
- Resource type Paper
- Author Channell, W
- OrganisationUSAID
- Year of Publication2006
- RegionGlobal
- LanguageEnglish
- Number of pages7 pp.
- EditionRAFI notes
- Keywords Credit Risk, Capital Markets