Collateral, Collateral Law and Collateral Substitutes
The report notes that in financial sector development, the possession of collateral largely determines whether certain categories of economic agents obtain access to the financial market and whether financial contracts are efficiently concluded, i.e., with least losses. It also highlights that collateral issues are relevant in targeted promotion strategies, like small enterprise and private sector promotion, respecting poverty alleviation.
The report defines collateral as an asset pledged by a borrower to a lender until a loan is paid back. If the borrower defaults, then the lender has the right to seize the collateral and sell it to pay off the loan. The purpose of this report is to tie together ongoing conceptual and field work on collateral law and substitution, to identify the outstanding issues, especially those relevant for policy-making and institutional learning and to formulate recommendations for donor agencies interested in the financial sector in developing countries and transition economies. The ultimate goal of this report is to influence policies, the regulatory framework and institutional behaviour with a view to innovative and effective collateral substitution. This would contribute to removing what is considered to be an important obstacle in the access of the poor to financial services.
The report is organised in 5 sections: the first part explores the extent and nature of the collateral constraint. The second section seeks to throw light on what is meant by collateral, collateral law and collateral substitutes and their respective functions. The third section reviews the available empirical evidence on the effects of the legal and regulatory framework and on the performance of substitutes. The fourth part summarizes findings. The report concludes with policy issues and points for discussion. Recommendations are given at the end of the report for central banks, representative organisations of SMEs and microenterprises, banks and governments (ministries of justice, finance and economy).
A useful glossary from Black’s Law Dictionary is also provided.