Friday, July 01, 2005
Promoting Financial Market Development. Secured Transactions Reform
By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2002
Financial markets in most countries in Latin America are undeveloped. Financial institutions do not effectively intermediate between savers and lenders. As a result financing for all but the largest borrowers is hard to obtain, interest rates are high and the margins between borrowing and lending are usually large. Many types of financing that are routinely available to businesses of all sizes in the industrial countries do not exist in much of Latin America. Since equity finance in the region is also almost universally underdeveloped, many businesses are frequently forced to rely on internally generated funding which in many cases severely hampers their ability to expand.
There are numerous reasons why financial markets are undeveloped, including the region’s history of macroeconomic instability . However, many observers have pinpointed the weak institutions that support financial markets as one of the most important reasons for the poor functioning of the financial sector, a contention that is supported by the fact that achieving price stability has not resulted in substantial financial market development in most countries. This paper focuses on movable property as a basis for securing business loans. It highlights the advantages of being able to pledge effectively movable property as collateral for business borrowing. It describes how the secured transactions framework, which is a shorthand term for the use of movable property as security for loans, operates in the industrial countries. It points out the consequences of not being able to use movable assets as security and shows how this limits firms financing options and biases assets holdings of companies and individuals. It points out that weakly protected moveable property rights especially harms farmers and the rural areas and contributes to rural-urban migration.
For: The InterAmerican Development Bank, 2002
Financial markets in most countries in Latin America are undeveloped. Financial institutions do not effectively intermediate between savers and lenders. As a result financing for all but the largest borrowers is hard to obtain, interest rates are high and the margins between borrowing and lending are usually large. Many types of financing that are routinely available to businesses of all sizes in the industrial countries do not exist in much of Latin America. Since equity finance in the region is also almost universally underdeveloped, many businesses are frequently forced to rely on internally generated funding which in many cases severely hampers their ability to expand.
There are numerous reasons why financial markets are undeveloped, including the region’s history of macroeconomic instability . However, many observers have pinpointed the weak institutions that support financial markets as one of the most important reasons for the poor functioning of the financial sector, a contention that is supported by the fact that achieving price stability has not resulted in substantial financial market development in most countries. This paper focuses on movable property as a basis for securing business loans. It highlights the advantages of being able to pledge effectively movable property as collateral for business borrowing. It describes how the secured transactions framework, which is a shorthand term for the use of movable property as security for loans, operates in the industrial countries. It points out the consequences of not being able to use movable assets as security and shows how this limits firms financing options and biases assets holdings of companies and individuals. It points out that weakly protected moveable property rights especially harms farmers and the rural areas and contributes to rural-urban migration.