Overview
Starting a business
GE T TING CREDIT
33
FIGURE 6.1
Stronger legal rights and more credit information are associated with more credit
Dealing with construction permits
FIGUR
Private credit as % of GDP
Private credit as % of GDP
Getti infor
100
100
Rankin
Getting credit
75
75
Protecting investors
50
50
25
25
Employing workers Registering property
Regul nonpo securi in mo prope
Paying taxes Trading across borders Enforcing contracts
0
Closing a business
Lower
Higher
0
Economies ranked by strength of legal rights index, quintiles
Lower
Higher Economies ranked by depth of credit information index, quintiles
Note: Relationships are significant at the 5% level and remain significant when controlling for income per capita. Source: Doing Business database; World Bank, World Development Indicators database (2008).
Tara grew a weaving hobby into a small textile business in the Federated States of Micronesia. Business picked up quickly, and within a year she was already starting to make a profit. With plans to expand, Tara approached Sangozi, a loan officer at her bank, for a line of credit. To find out whether Tara qualified for a low-interest loan program for femaleowned businesses, Sangozi needed to check her credit record. But there was no database that shared information on credit histories. With no credit report to show Tara’s creditworthiness, Sangozi looked at which assets Tara could use as collateral. While Tara rents the premises for her business, she owns all the machinery. To raise the funds for start-up, Tara had created a nonpossessory pledge over these
movable assets and registered it with information on coverage (figure 6.2). FIGURE 6.deleted the electronic registry created women are not as lucky as Access to creditcollateral is seen as an obstacle in developing Many economies 146 entrepreneurs are less likely 2 years before. Her inventory, machinTara. Female Firms perceiving access to credit as an obstacle (%) ery and other movable assets, together to have the collateral needed for business Private credit as % of GDP with the record of her assets from the loans.3 This hinders their potential. Re56 52 collateral registry, proved to be enough: cent research in India shows that “given 48 47 46 Sangozi gave Tara a line of credit. As long the difficulty that poor women in the 38 as Tara makes her loan payments, she33 rural sector have historically had in gain28 28 continues to use the machinery securing ing access to the formal financial system, 22 21 20 her loan. it is not 14 surprising that when they are Access to information on credit and able to secure a loan, their probability on registered assets used as collateral of engaging in entrepreneurial activity Asia & Latin Eastern South 4 Sub-Saharan Middle East helps East creditors assess the creditworthishows a OECD strong increase. Pacific America high Africa Europe & & North Africa Asia ” & Caribbean income Central Asia ness of potential future clients. Although Women tend to borrow from miWorld Bank Enterprise Development Indicators aSource: credit history is Surveys; not aWorld substitute for database. crofinance institutions, but in small risk analysis, when banks share credit amounts that often fall short of the miniFIGURE 6.3 information, loan officers can assess bormum thresholds required by credit regCredit information coverage grew quickly in economies with new credit bureaus rowers’ creditworthiness using (% objective istries to build a credit history. Only 22% Borrowers covered by credit registries of adults) measures. And if lenders are also reasof public credit registries and 52% of Croatia sured by strong creditors’ rights, it alprivate credit bureaus around the world Czech Republic lows them to take greater, well-informed Table 6.1 FIGURE 6.1 risks.1Poland This in turn can make access to FIGURE 6.2 Where is getting credit easy— Stronger legal rights and more credit information are associated with more credit Getting credit: collateral rules and credit and where not? financeLatvia easier, particularly for small and Private credit as % of GDP Private Turkey credit as % of GDP information Easiest Rank Most difficult Rank medium-size entrepreneurs. Where col100 100 Bulgaria Rankings are based onCoverage 2 subindicators in Coverage in lateral laws are effective and credit regisMalaysia 1 Iraq 174 2006 2009 Armenia tries are present, banks are more likely to 62.5% Regulations on South Africa 2 Madagascar 175 75 75 nonpossessory Strength 33% of Romania United Kingdom 3 Tajikistan 176 extend loans (figure 6.1).2 33% Increase security interests legal rights index Australia 4 Bhutan 177 Albania Doing Business measures the legal in movable 50 50 (0–10) Bulgaria 5 Djibouti 178 property 0 20 and the 40 60 80 rights of borrowers and lenders 37.5% Hong Kong, China 6 Eritrea 179 Source: Doing Business database. 25 25 scope and quality of credit informaDepth33% of credit Israel 7 Venezuela, R.B. 180 information index tion systems. The first set of indicaNew Zealand 8 Syrian Arab 181 FIGURE 6.4 (0–6) 0 0 tors describes how well collateralacross and regions Singapore 9 Republic Lower Lower Higher Coverage of borrowers varies widelyHigher Scope, quality and accessibility bankruptcy Economies laws facilitate The ranked by rankedlending. by United States Economies 10 Timor-Leste 182 of credit information through public Depth of credit information index (0–6) strength of legal rights depthset of64.0 credit information index, quintiles Palauindex, quintiles 183 second measures the scope, quality and private credit registries Borrowers covered by credit registries (% of adults) and accessibility of credit information Note: Relationships Rankings on are thesignificant ease of getting credit the Note: at the 5% levelare andbased remainon significant when controlling for income per capita. Note: Private bureau coverage and public registry coverage sum of the strength of legal rights index and the depth of credit available through public credit registries are measured but do not count for the rankings. Source: Doingindex. Business World World Development Indicators database (2008). information Seedatabase; Data notes forBank, details. See Data notes for details. Source: Doing Business database. and private credit bureaus and provides FIGURE 6.deleted
Access to credit is seen as an obstacle in developing economies Firms perceiving access to credit as an obstacle (%)
146
33.2
29.3
5
4
19.6
3
3 15.2
Scope of cre and p
Note: P are me See Da