This indicator measures the depth of available credit information and the effectiveness of collateral and bankruptcy laws in facilitating lending.
Relationship to Growth & Poverty Reduction
The ability to access affordable credit is a critical element of private sector led growth, particularly for small businesses that often lack the initial capital needed to grow and expand and also for agricultural households, where expenditures on inputs precede the returns from harvest; it also increases a business or household’s ability to bear and cope with risk. Visible credit information registries are vital because with credit information sharing, lenders are more aware of borrowers’ capacity and ability to repay their loans, which can significantly decrease default rates, lowering the perceived risk of lending and cost of capital; the registries can also lead to greater inclusiveness of low-income borrowers due to efficiency gains on the part of the lenders via the lowered default rates. Additionally, collateral laws that permit a broad definition of collateral help to eliminate “dead capital,” which can help reduce interest rates and encourage greater loan volumes.
The Access to Credit composite indicator is calculated by taking the simple average of two IFC indicators, which have been normalized and ranked on equivalent scales:
- Depth of Information: The depth of credit information index measures rules and practices affecting the coverage, scope and accessibility of credit information available through either a public credit registry or a private credit bureau. A score of 1 is assigned for each of the following 6 features of the public credit registry or private credit bureau (or both):
- Both positive credit information (for example, outstanding loan amounts and pattern of on-time repayments) and negative information (for example, late payments, number and amount of defaults and bankruptcies) are distributed.
- Data on both firms and individuals are distributed.
- Data from retailers and utility companies as well as financial institutions are distributed.
- More than 2 years of historical data are distributed. Credit registries and bureaus that erase data on defaults as soon as they are repaid obtain a score of 0 for this indicator.
- Data on loan amounts below 1% of income per capita are distributed. Note that a credit registry or bureau must have a minimum coverage of 1% of the adult population to score a 1 on this indicator.
- By law, borrowers have the right to access their data in the largest credit registry or bureau in the economy.
The index ranges from 0 to 6, with higher values indicating the availability of more credit information, from either a public credit registry or a private credit bureau, to facilitate lending decisions. If the credit registry or bureau is not operational or has coverage of less than 0.1% of the adult population, the score on the depth of credit information index is 0.
- Strength of Legal Rights: This component measures the extent to which bankruptcy and collateral laws protect the rights of borrowers and lenders to facilitate lending. It contains 8 aspects related to legal rights in collateral law and two aspects in bankruptcy law. A score of 1 is assigned for each of the following features of the laws:
- Any business may use movable assets as collateral while keeping possession of the assets, and any financial institution may accept such assets as collateral.
- The law allows a business to grant a nonpossessory security right in a single category of movable assets (such as accounts receivable or inventory), without requiring a specific description of the collateral.
- The law allows a business to grant a nonpossessory security right in substantially all its movable assets, without requiring a specific description of the collateral.
- A security right may extend to future or after-acquired assets and may extend automatically to the products, proceeds or replacements of the original assets.
- A general description of debts and obligations is permitted in the collateral agreements and in registration documents: all types of debts and obligations can be secured between the parties, and the collateral agreement can include a maximum amount for which the assets are encumbered.
- A collateral registry or registration institution is in operation, unified geographically and by asset type, with an electronic database indexed by debtors’ names.
- Secured creditors are paid first (for example, before general tax claims and employee claims) when a debtor defaults outside an insolvency procedure.
- Secured creditors are paid first (for example, before general tax claims and employee claims) when a business is liquidated.
- Secured creditors are not subject to an automatic stay or moratorium on enforcement procedures when a debtor enters a court-supervised reorganization procedure.
- The law allows parties to agree in a collateral agreement that the lender may enforce its security right out of court.
The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit.
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