Credit Infrastructure

Modern Secured Transactions Laws and Collateral Registries have a dramatic impact on economic development. Collateral provides the basis for free-flowing credit markets, reducing the potential losses lenders face from non-payment. While land and buildings are widely accepted as collateral for loans, the use of movable collateral (such as inventory, accounts receivables, crops and equipment) is restricted because many countries do not have functioning laws and registries to govern secured transactions.

Reforming the framework for movable collateral lending allows businesses—particularly SMEs—to leverage their assets into capital for investment and growth. Modern Secured Transactions Registries increase the availability of credit and reduce the cost of credit.

Our main objective: Increasing access to credit for firms

We assist government clients in developing the appropriate legal and institutional frameworks to allow and encourage the use of movable assets as collateral for loans.

We combine deep knowledge and global experience to help modernize legislation, build electronic registries, and improve the capacity of stakeholders. In delivering the program, we work closely with World Bank Group partners and with public and private stakeholders and other international organizations.

Results:

• Between October 2007 and June 2011 the secured transactions reform work the World Bank Group supported in China cumulatively facilitated US$3.58 trillion accounts receivable financing, of which US$1.09 trillion went to SMEs. As a result of the reform the total number of commercial loans involving movable assets grew by 21% per year over 2008-2010, versus a flat rate over the period 2006-2008.
• In Colombia, in less than one year more than 100,000 loans secured with movable assets have been registered in the movable collateral registry, of which 5,000 were for SMEs for an aggregate amount of US$3.43 billion (compared to a few hundred per year before the reform).
• Liberia started a collateral registry in 2014 to securitize movable assets, making it possible for farmers and entrepreneurs to use such assets against which they could borrow money.  In less than a year since its launch – most of which was during the Ebola crisis – US$227 million in loans were registered.
• In Afghanistan, the recent establishment of the Public Credit Registry to determine the credit performance of borrowers has significantly improved access to financing of small and medium enterprises.
• In May 2016, Nigeria launched a modern online collateral registry with the support of the World Bank Group. The registry will allow low-income people and small-scale entrepreneurs to secure loans against movable assets such as machinery, livestock, and inventory.

Emerging technological innovations such as big data and fintech are disrupting the financial sector, and enabling credit reporting service providers (CRSPs) to access, collect, aggregate, manipulate, analyze, and present credit information data from many new sources and large quantities of data in a faster and more efficient manner. The most prevalent of these emerging technologies and the ones that hold the most relevance for credit reporting are described in Box 1. These technologies show the promise of becoming even more relevant in the post-COVID-19 environment as organizations look to establish a truly digital presence and automate as many of their processes as possible. 

As emergent technologies populate the market, knowledge gaps are also arising – with questions around the benefits versus costs of these technologies, what appropriate models look like, and the legal and regulatory challenges to adopt these technologies, just to name a few. Thus, in addition to IFC’s core offering, which will continue to undertake the basic reforms in many economies, IFC’s offering also helps to create opportunities and mitigate risks associated with these disruptive technologies in the credit reporting space. This includes setting the ground for next-generation policy and regulatory issues, responding to changes in the market and aiming to promote an enabling environment or “response” types of support to these emerging innovations.

Types of activities undertaken to address the challenges and opportunities arising out of these emergent technologies include the following:

1. Technological innovation in credit reporting: At the regional level, IFC delivers services that may include some or all the following components: (i) Diagnostics to assess country level availability of innovative technologies; (ii) Development of tools to guide clients in the adoption of these various technologies (roadmap): (iii) Technical guidance to support stakeholders’ informed decision making related to selecting vendors to develop or deploy these innovative technologies, where appropriate; and (iv) Support to regulators and policymakers in developing the appropriate enabling environment to encourage the utilization of these new innovative technologies, where they have proven value (efficiency, speed, cost savings, analytical capacity, etc.) to furthering the development of credit reporting systems.
   
   At the global level, IFC develops a knowledge base on the most common uses of key innovative technologies in credit reporting systems development (those technologies identified in this proposal (cloud computing, APIs, DLT and AI/ML), as well as preconditions for their use, success rate of deploying and challenges of leveraging such technologies and a detailed cost-benefit analysis of using these.
   
2. Alternative data for credit reporting:  Adoption and usage of alternative data can enhance access to finance for MSMEs and marginalized individuals such as women and displaced people, who tend to have thin or no credit files, affecting their ability to access credit from formal financial institutions and other firms.
   
   At the regional level, research and stocktaking interventions include (a) assessments of the alternative data landscape to assess the feasibility of adopting and integrating alternative data in credit information sharing, and (b) technical assistance to support countries with legal and regulatory reforms that will help in mainstreaming the sharing and processing of alternative data for credit reporting. The team also provides support for legal and regulatory reforms, including safeguards, to help mainstream the sharing and processing of alternative data.
   
   At the global level, the team: (i) supports a pilot to assess the predictiveness of alternative data in a sandbox environment; (ii) builds capacity of stakeholders around alternative data acquisition and management; and (iii) provides training to market participants on innovative credit scoring techniques. Also, the team supports the development of a toolkit built of lessons learned from interventions (which will provide theoretical and empirical evidence of the predictiveness of alternative data for creditworthiness assessments) for replicating the offering across other markets.
3. Regulation technology / supervision technology (RegTech/SupTech): As new technologies emerge, regulators and supervisors have an opportunity to adopt RegTech and SupTech to increase efficiencies, security, and cost effectiveness of their financial oversight role. Conversely, data providers and CRSPs can benefit from increased compliance, better on-boarding and identity management, regulatory reporting, and risks management by adopting RegTech.
   
   To promote the adoption and usage of Regtech/Suptech solutions to enhance automation and effectiveness of micro and macroprudential supervision of credit reporting ecosystem, at the regional level, IFC: (i) conducts research and stocktaking with a mapping exercise of the challenges faced by credit reporting authorities and the opportunities of deploying SupTech solutions; (ii) supports the development of RegTech and analytics solutions; and, (iii) supports the development of APIs to promote automated and real-time submission of credit data.
   
   At the global level, IFC: (i) pilots the deployment of RegTech/SupTech to promote automation of supervisory processes; (ii) provides capacity building to supervisory agencies and regulated entities on the use of the technologies; and (iii) develops a manual / toolkit on the RegTech/ SupTech that includes the deployment experience, key success factors, use cases and lessons learned.
4. Automated platforms and predictive risk/management tools for industries such as agriculture:
   
   The program team conducts diagnostics, stocktaking and validation activities (feasibility studies) to identify potential bureaus, conduct market assessments and market sizing for the demand in the agri-finance sector. IFC supports the development of tools, including psychometric tools and digital marketplace platforms, and conducts capacity building activities with the financial institutions engaged in agri-lending.
   
   
5. Cross-border credit information sharing: The world has been experiencing unprecedented levels of voluntary migration and forced displacements over the past decade. Notwithstanding the size of the migrant population and their contribution to their new and old societies, their ability to access credit and other services is hampered – among other things - by inaccessibility to their credit history.
   
   Some countries have undertaken initiatives on cross-border information and innovations have been developed to bridge the legal deficiencies of cross-border information sharing, such as “credit passports” developed by CRSPs. While these enable data subjects to carry their credit data across borders, its effectiveness is curtailed by the need to execute multiple agreements and that it deals with the problem at a micro level (individual data subject). Additionally, the service is limited to a certain number of countries.
   
   In order to provide theoretical and practical underpinnings on promoting cross-border information sharing, IFC: (i) conducts diagnostics and stocktaking on cross-border credit information sharing; and (ii) supports the development or deployment of customer centric data sharing platforms to enable borrowers to own their information and empower them to actively manage it.
   
   At the global level, IFC: (i) supports piloting of cross-border information sharing in one regional economic bloc; and (ii) through the ICCR and building on the diagnostic activities and pilot, draft and issue guidelines on how to promote cross-border information sharing across the globe.