assessing infrastructure for intermediation legal framework and credit information systems l.
Skip this Video
Loading SlideShow in 5 Seconds..
Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems PowerPoint Presentation
Download Presentation
Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems

Loading in 2 Seconds...

play fullscreen
1 / 34

Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems - PowerPoint PPT Presentation

  • Uploaded on

Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems. Thorsten Beck. Introduction. Infrastructure is set of institutions and rules for functioning of financial system Legal infrastructure: laws and their enforcement, corporate governance

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
assessing infrastructure for intermediation legal framework and credit information systems

Assessing Infrastructure for Intermediation: Legal Framework and Credit Information Systems

Thorsten Beck

  • Infrastructure is set of institutions and rules for functioning of financial system
  • Legal infrastructure: laws and their enforcement, corporate governance
  • Informational infrastructure: credit information sharing, accounting and auditing rules and practice
  • Transactional infrastructure: retail and wholesale payment systems
the importance of the legal framework for the financial system
The Importance of the Legal Framework for the Financial System
  • Financial contracts depend on certainty of legal rights and predictability and speed of their fair and impartial enforcement
  • Regulation and supervision of financial system requires legal and regulatory framework
legal framework overview
Legal framework - overview
  • Financial sector legislation
  • Corporate sector framework
  • Collateral and creditor rights
  • Insolvency framework
  • Judicial system
legal framework financial sector legislation
Legal Framework: Financial Sector Legislation
  • Central Bank, Bank Supervisory Authority Legislation
    • Independence, objectives, accountability
  • Banking/financial institutions legislation
    • From cradle to grave, bank secrecy
  • Payment system legislation and regulation
    • Finality of payment, zero hour rule
  • Anti-money-laundering (AML), Combating the financing of terrorism (CFT) legislation
  • Government debt management legislation
  • Capital markets legislation
  • Insurance sector legislation
legal framework corporate sector framework
Legal Framework: Corporate Sector Framework
  • Company law
    • Regime for formation, registration and operation of companies
    • Different types of companies (limited liability, joint stock, partnerships etc.)
  • Corporate governance
    • Relationship between stakeholders of companies
      • Directors’ duties
      • Shareholder rights
      • Audit and accounting practices
    • Laws and regulations
    • Regulatory agencies enforcing legislation and regulations
    • Business culture and practices
legal framework collateral and creditor rights
Legal Framework: Collateral and Creditor Rights
  • Predictable, transparent and affordable enforcement of unsecured and secured claims outside the insolvency system
  • Civil Code, laws on insolvency, land, pledge, mortgages, execution
  • Registers for movable and immovable property, registration procedures
  • Restrictions on ownership, transfer, pledge
  • Loan documentation
  • Role of Notary Public
  • Court / non-court enforcement procedures
legal framework insolvency framework
Legal Framework: Insolvency Framework
  • Legal framework for corporate insolvency
    • Provide for timely, efficient and impartial resolution
    • Maximize value of assets and recoveries
    • Efficient liquidation of nonviable and rehabilitation of viable businesses
    • Equitable treatment of similarly situated creditors
    • Transparent procedure
    • Framework for cross-border insolvencies
  • Informal out-of-court procedures for work-out
  • Institutional framework
legal framework effective insolvency and creditor rights systems
Legal Framework: Effective Insolvency and Creditor Rights Systems
  • Principles and Guidelines for Effective Insolvency and Creditor Rights Systems
  • Developed in 1999/2000 by WB and other organizations and experts
  • 35 principles in four areas:
    • Creditor rights and enforcement systems
    • Corporate insolvency
    • Credit risk management, debt recovery and informal enterprise workout practices
    • Effective implementation of legal mechanisms
legal framework judicial system
Legal Framework: Judicial System
  • Courts are “slow, corrupt, incompetent and expensive”.
  • Judges
    • Appointment, dismissal, independence, salaries, promotion
  • Infrastructure
    • Location of courts, buildings, libraries, computerization, budget, administration
  • Procedures
    • Code of Civil Procedure, filing fees, appeal procedures, injunctions, case management, allocation of cases, execution of judgments
  • Court Officials
    • Prosecutors, bailiffs, police, court staff, lawyers, bar associations, discipline
  • Arbitration, mediation, specialized courts
legal framework cross country comparisons
Legal framework: Cross-country comparisons
  • Doing Business database; case study approach:
    • Claim equals twice country’s income per capita, creditor (plaintiff) is 100% right, judicial process, which ends in favor of creditor:
      • Number of procedures legally required between the parties
      • Time (days) spent in dispute resolution until payment
      • Cost (fees, duties etc.) of going through the court procedure, relative to debt value
    • Transfer of land and building in a peri-urban area of the country’s most populous city, 50 times income per capita.
      • Number of procedures legally required to register property
      • Time (days) spent in completing procedures
      • Cost (taxes, fees, duties etc.) relative to property, only official costs
    • Insolvency: time (in days), cost (as percentage of estate) and recovery rate (cents on the dollar)
legal framework cross country comparisons15
Legal framework: Cross-country comparisons

Source: Doing Business project, http:\\\doingbusiness

the role of credit reporting systems in financial markets
The Role of Credit Reporting Systems in Financial Markets
  • Reduce asymmetric information between borrowers and lenders
  • Allow lenders to more accurately evaluate risk and avoid adverse selection
  • Strengthen incentives for borrowers to repay, reducing moral hazard
    • Increase the cost of default
    • Provide an incentive for good borrowers: Reputation Collateral
  • Increase competitiveness, reduce segmentation
credit information systems overview
Credit information systems - overview
  • Institutions and sources of information
  • Public vs. private registries
  • Elements of a robust credit registry system
financial information infrastructure primary institutions sources of data
Financial Information Infrastructure: Primary Institutions & Sources of Data
  • Consumer Credit Reporting Firms & Registries
  • Commercial Credit Reporting Firms & Registries
  • Corporate Registries
  • Ratings Firms
  • Microfinance Credit Bureaus
  • Industry Specific Databases (insurance, property management, utilities, cell phones, agricultural commodities, etc.)
  • Other Public Data (public databases, Chambers of Commerce / Better Business Bureau, media)
information in credit reports
Information in credit reports
  • The heart of the credit report is the detailed payment history it provides
    • Positive payment history empowers good borrowers, creates reputation collateral
    • Negative payment data encourages honoring obligations

Lender Account No. Date Opened & Credit Limit & Payment

Date Reported Past Due History

B of A XXXX 1-1-2000 $5,000 30 day - 1

6-1-2004 $0

advantages and shortcomings of public credit registries
Advantages and Shortcomings of Public Credit Registries


  • Public credit registries can compel banks to report, especially important in economies with concentrated financial systems
  • Public credit registries can operate where the legal environment is inhospitable for private ventures
  • Public credit registries may engender additional confidence, depending on country experiences
  • Public credit registries provide data for bank supervision


  • Data sources and distribution of data are more limited for private credit registries
  • Public credit registries have fewer resources (staff, funding, technology)
  • Public credit registries do not offer value-added services such as credit scoring
  • Public credit registries offer limited consumer attention
elements of a robust credit reporting system
Elements of a Robust Credit Reporting System
  • Providers and users of credit data
  • Institutional arrangements
  • Quality of the data collected
  • Quality of the data distributed
  • Legal framework for credit reporting
  • Regulatory framework for credit reports
  • Use of credit information for bank supervision
  • Consumer outreach & education
providers and users of credit data
Providers and users of credit data
  • Commercial Banks and other regulated financial institutions (credit card issuers, insurance firms, automobile finance companies, mortgage lenders/guarantors)
  • Retailers (appliance retailers, other stores)
  • Firms providing business-to-business credit, trade credit
  • Microfinance institutions
  • Other businesses which provide goods or services on credit (utilities, cell phone providers, agribusiness, etc.)
providers and users of credit data26
Providers and users of credit data
  • What is the financial market structure?
    • How concentrated is the banking / financial sector?
  • What are the main financial sector products?
    • Are banks lending to a broad spectrum of the population? Do they offer varied products & services?
  • What are the most important non-bank sources of finance? How are these changing?
  • In the real sectors of the economy, what are the most important sources of financial services and credit? Are there special industry credit services?
  • What role does microfinance play?
quality of the data collected
Quality of the Data Collected
  • Collect both positive & negative information
  • Maintain data for a reasonable time frame – 5 years minimum
    • Do not delete negative data when debt is repaid
    • Data should be inaccessible after a certain amount of time
  • Credit reports should not include highly sensitive information such as political or religious affiliation, etc….
  • Other identifying information, such as gender, should be evaluated more carefully
quality of the data distributed
Quality of the Data Distributed
  • Integrity and transparency are paramount
    • Special standing of any group, including owners or government, will discourage participation
  • Open system preferable, reciprocity not necessary
  • Access to more detailed information preferable
    • Loans described individually, not aggregates
    • Institutions providing credit identified
  • Restrictions to prevent “cherry-picking”
  • Distribution reflects privacy considerations
legal framework for credit reporting
Legal framework for credit reporting
  • Legal framework should encourage information sharing among lenders
    • Provide legal clarity regarding acceptable information sharing practices
  • Consideration of privacy issues important
    • Broad privacy or data protection laws may unduly limit credit reporting – balance privacy with economic impact of limiting access to data
  • Competition policy aspects of credit information
legal framework for credit reporting consumer protection
Legal framework for credit reporting:Consumer protection
  • Borrowers should have access to their own data
  • Notice of adverse actions based on report
  • Record who has accessed data as part of report
  • Consumer-friendly procedures in place to challenge erroneous information in reasonable time frame
  • Clearly established privacy policy
regulatory framework for credit reporting
Regulatory framework for credit reporting
  • Regulatory framework usually weaker than legal framework in developing countries
  • Regulatory framework with enforcement
    • Can, and do, regulators effectively enforce laws and regulations, via:
      • Audits
      • Lawsuits
      • Fines
      • Reviewing industry codes of conduct
    • Do consumers have the ability to bring complaints outside the judicial system?
use of credit information for bank supervision
Use of credit information for bank supervision
  • Supervisors include financial institutions’ use of credit information as part of inspections, both on- and off-site
  • Use data from PCRs to identify large problem borrowers, to fine-tune regulations and in analytical work to identify risk-categories of borrowers
  • Require publicly (government) owned financial institutions to provide data to legitimate credit reporting firms, associations
  • Encourage all financial institutions to participate in credit reporting
consumer outreach and education
Consumer Outreach and Education
  • Readily available information on managing credit and on the rights & responsibilities of borrowers regarding credit reporting
    • Printed materials at appropriate level, language (internet, banks, retailers, government offices can all provide access)
    • Radio or television public service ads
  • Role of industry in providing consumer assistance
  • Outreach to lenders on importance of credit information
  • Outreach to other interested parties (judges, microfinance institutions, etc.)