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Increasing Access to Credit through Reforming Secured Transactions

The Middle East and North Africa (MENA) region lags behind all others in firms’ access to private credit, as well as in the introduction of secured transactions reform. Insufficient suitable collateral is among the top reasons for difficulty in accessing finance. Reforming the area of secured transactions can result in increasing access to credit for businesses, particularly small and medium-sized enterprises (SMEs), and spur private sector development and economic growth. The MENA region had the lowest percentage of firms with credit lines or loans from financial institutions, and moreover, enterprise survey data from 7 countries in MENA point out that collateral requirements for firms requesting loans are substantial. Increasing the protection of creditor’s rights and enforcement mechanisms can lead to a considerable increase in private sector credit to GDP.

There are a number of weaknesses in secured transaction systems across the region. None of the MENA countries have introduced secured transactions legal reforms, and none of them have developed modern movable collateral registries. Borrowers with collateral get 9 times the level of credit given their cash flow compared to borrowers without collateral. Most of the countries have obsolete and fragmented secured transactions provisions governed by different laws that have not been reformed in many years, and the MENA region as a whole performs poorly with regard to creditor rights. Better secure transaction systems lead to more credit and fewer defaults.

Reforms in the MENA region should be undertaken to improve its secured transactions framework. The focus should be on the creation of modern transaction laws and electronic movable collateral registries in addition to improving enforcement mechanisms for security interests in movable property. A standardized approach should be used when reevaluating the legal infrastructure, in line with core secured transaction system principles, so that cross financing secured with movables in the region can properly develop. A specific law should be developed on secured transactions that regulate every aspect of a secured transactions system, moving away from the current system of fragmented provisions in different bodies of the law (Civil Codes, Commercial Codes, Mortgage Laws, Debt Recovery, etc). Countries should broaden the scope of the secured transactions laws, modernize movable collateral registries, and establish a clear priority scheme for secured creditors. Substantial efforts should be made in improving enforcement mechanisms. Enforcement and collection of debts upon defaulted loans is possibly the major impediment for increasing access to credit in the MENA region. Speedy, effective, and inexpensive enforcement mechanisms are essential to realizing security interests, and reformers are encouraged to align reforms to enforcement procedures with international best practices.

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