Collateral regulation

The establishment of collateral in relation to a loan transaction means that the lender is assured of recovering, if necessary by court action, the material value of the loan. For an asset to serve as collateral it must be appropriable and saleable; it must be something which would constitute a loss to the borrower; it must be durable or sustainable during the loan contract and it must have transaction costs that are reasonable for borrowers, both with regard to the loan amount and the term of the loan. The presence of risk in loan transactions means that the outreach of financial services is influenced by the collateral that borrowers can offer. Conventional collateral includes the mortgage of land or pledging of moveable assets. It also includes third-party guarantees or endorsements. Leasing is an alternative arrangement whereby ownership of an asset is not transferred until the item is fully paid for. Policy-makers can help to create a system and legal environment in which collateral may be effectively used, e.g. by accelerating the issuance of land rights, renting rights, and authorization papers, ensuring fair and accurate asset valuation, setting up out-of court settlement systems, etc.

Library Resources

resource title type year resource
Experiences in Gender-Sensitive Solutions to Collateral Constraints Report 2020

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This resource appears in: Collateral regulation, Gender

Use of non-conventional collateral (NCC) in agricultural lending, together with an effective registry system and appropriate regulatory frameworks, can contribute to improved access to and use of appropriate and affordable credit by smallholder women farmers.

This learning paper provides financial service providers and policymakers guidance on the potential for NCC to increase access to credit for women smallholder farmers, promote greater financial inclusion, and the importance of registries and sound legal frameworks to achieving this goal. Women’s organizations promoting financial inclusion can also benefit from this additional evidence to support their continued promotion of NCC and collateral registries.

Fair Play: Ensuring Competition in Digital Financial Services Paper 2019

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This resource appears in: Rural Financial Services, Rural Financial Services: General, Collateral regulation, Prudential regulation

Providing guidance to financial sector regulators for identifying anti-competitive behavior

In many emerging economies, digital financial services (DFS) markets are limited to one or two major providers, reducing innovation, customer choice and potentially facilitating monopolistic or cartelistic behavior. Why are DFS markets prone to concentration? Is this a problem?

This primer applies a framework to help answer these questions and demonstrate how regulation can have a substantial impact on competitive dynamics in the DFS marketplace. The paper also proposes regulatory levers that policy makers can use to promote more competition. Looking ahead, a competitive landscape becomes especially important given the rising importance of customer data and the entry of large, multinational technology companies into DFS markets.

Author Matthew Soursourian & Ariadne Plaitakis
Publisher CGAP
Number of Pages 32 pages
Primary Language English (en)
Region / Country Global
Keywords Competition, digital financial services, emerging economies, customer choice, multinational technology
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Non-conventional collaterals to leverage innovation capital for smallholder farmers in Bolivia 2019

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This resource appears in: Rural Financial Services: General, Collateral regulation

Access to credit is a widely studied issue in the development literature and has been studied from various perspectives. One of those perspectives and the one that this project focuses on, is on the use of non-conventional collateral to reach a larger part of the population of small scale producers who may not be able to use a house or land to back the loan operations they need to access. In general, a collateral is viewed as a control and risk management measure: if the borrower should fail to make his or her payments with the cash flow of the activity the loan was to finance, the collateral acts as an alternative and last instance form of payment, that allows the lender to collect at least some of the principal given to the borrower.

Following a tradition of lending innovations, the microfinance sector has allowed the use of movable and non-conventional collateral in its credit operations, considering that the absence of traditional collateral is thought to be a restriction to access to credit (Beck et al., 2004 y Demirguc-Kunt et al., 2002). If it had not been through an alternative form of collateral, some groups would completely miss the opportunity to get a loan (Andersen & Nina, 1998; Fedele, 2005). However, such collaterals have not been of much interest to major banks and to the majority of the banking industry, despite its beneficial effects on financial inclusion (Habitan 2016).

Author Paul Villarroe
Publisher MEDA
Number of Pages 46 pages
Primary Language English (en)
Region / Country Global
Keywords Capital, non-conventional collateral, Innovation
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Deposit Insurance Treatment of E-Money Brief 2019

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This resource appears in: ICT applications, Collateral regulation, Prudential regulation

The expansion of digital financial accounts among poor customers has raised the question of whether e-money should be covered by deposit insurance and if so, how. This Technical Note examines the options while arguing that deposit insurance should not be the first line of defense, for two primary reasons. In many emerging markets where authorities have limited resources, their first area of focus should be on strong prudential regulation and supervision to ensure safe and sound institutions. Second, electronic money issuers are engaged in a narrow set of activities and in most cases pose limited or no systemic risk, compared with financial institutions that intermediate deposits and issue credit.

Author Juan Carlos Izaguirre, Denise Dias, Mehmet Kerse
Publisher CGAP
Number of Pages 24 pages
Primary Language English (en)
Region / Country Global
Keywords Deposit Insurance, e-money, Regulation
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Quel bilan pour la politique agricole ouest-africaine, dix ans après son adoption ? Report 2016 French (fr)

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This resource appears in: Collateral regulation

En janvier 2005, les chefs d’Etat et de gouvernement de la Communauté économique des Etats de l’Afrique de l’Ouest (Cedeao) adoptaient une politique agricole régionale : l’Ecowap. Dix ans plus tard, où en est-on de cette politique ambitieuse qui visait à la fois l’amélioration de la sécurité alimentaire, le développement économique et social et la réduction de la pauvreté et des inégalités entre les territoires de la région ? Quels programmes et quels dispositifs ont été mis en œuvre ? Ont-ils permis de se rapprocher des objectifs fixés ? Cette note de synthèse aborde ces questions. Elle a été réalisée à la suite du processus de bilan des dix premières années de l’Ecowap, conduit en 2015 par la Cedeao. La première partie de cette note rappelle l’ambition et les objectifs initiaux de l’Ecowap. La seconde vise à dresser un état des lieux de la mise en œuvre de cette politique. La troisième partie fait ressortir quelques éléments de bilan et de débats.  

Lien vers la publication  -  French (fr)

Author Inter-réseaux Développement rural
Number of Pages 8
Primary Language French (fr)
Region / Country Global, Africa, Western Africa
Keywords Dialogue Politique, Politique agricole, Coopération régionale, Sécurité alimentaire, Développement économique, Investissement Agricole
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Bringing More Dead Capital to Life Paper 2006

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This resource appears in: Collateral regulation

This paper highlights that banks are more likely to lend – and at better rates – when a borrower can offer collateral to secure the loan. Lenders may provide unsecured credit to some borrowers, but the amounts are less and the costs are higher than for secured loans. As the paper notes, this can be particularly true outside the urban centres, where seasonal production cycles and cyclical cash flow require flexibility in structuring credit. When borrowers can offer valuable collateral, lenders provide more and better rural and agricultural credit.

Worldwide, the best known and most utilised form of collateral is real property – land and the buildings on it. Unfortunately, many people in developing countries do not own real property, or not in a manner that banks recognize as acceptable collateral. Farmers often own land, but even if they have titles, they may be understandably hesitant to risk their newly titled holdings to secure loans. Others may only rent or hold customary rights, which are generally not accepted as collateral. More options are needed to expand access to secured lending in the agricultural sector.

This paper draws attention to the various types of property that can be used as collateral. Movable and intangible property can serve as collateral and broaden the secured lending options for both borrowers and lenders.2 Tangible movable property such as cars, tractors, farming equipment, inventory, crops, cows and a host of other items are valuable forms of collateral in some countries. Intangible property - accounts receivable, trademarks, leases, future harvests and even rights in these rights (derivatives) - can also serve as collateral and enable producers to meet financing needs. These various forms of property can be used effectively for secured lending, however, only if the legal system permits their use as collateral.

In much of developing world, movable and intangible property is overlooked. This note explores the rationale for moveable property registries and how these systems work to broaden access to credit.

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