(Frequently asked questions on Credit Information are available here.)
- What is your indicator designed to measure?
- How do you take into account economies’ legal tradition and their big cities?
- What is a functional approach to secured transactions?
- What types of security interests do you take into consideration in assessing the functional approach to secured transactions?
- What kinds of rights can secured creditors have during an automatic stay on enforcement when a debtor enters a court-supervised reorganization procedure?
- Can you give us an example of an economy that recently reformed in this area?
- Does the getting credit–legal rights index record the de jure (the law) or de facto (the practice) situation?
- When are reforms related to the getting credit – legal rights indicator taken into account?
What is the indicator set designed to measure?
The strength of legal rights index measures the strength of the secured transactions system in 190 economies. The index includes 12 components. These include 10 aspects related to legal rights in collateral law and 2 aspects related to legal rights in bankruptcy law. A score of 1 is assigned for each of the following features of the laws:
· The economy has an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of 4 functional equivalents to security interests in movable assets: fiduciary transfer of title; financial lease; assignment or transfer of receivables; and sale with retention of title.
· The law allows a business to grant a nonpossessory security right in a single category of movable assets (such as machinery, inventory, and account receivables), without requiring a specific description of the collateral.
· The law allows a business to grant a nonpossessory security right in substantially all its movable assets, without requiring a specific description of the collateral.
· A security right can be given over future or after-acquired assets, and extends automatically to the products, proceeds and replacements of the original assets.
· A general description of debts and obligations is permitted in the collateral agreement and in registration documents, all types of debts and obligations can be secured between the parties, and the collateral agreement can include a maximum amount for which the assets are encumbered.
· A collateral registry or registration institution for security interests granted over movable property by incorporated and nonincorporated entities is in operation, unified geographically and with an electronic database indexed by debtors’ names.
· The collateral registry is a notice-based registry—a registry that files only a notice of the existence of a security interest (not the underlying documents) and does not perform a legal review of the transaction. The registry also publicizes functional equivalents to security interests.
· The collateral registry has modern features such as those that allow secured creditors (or their representatives) to register, search, amend or cancel security interests online, without the intervention of a third party.
· Secured creditors are paid first (for example, before tax claims and employee claims) when a debtor defaults outside an insolvency procedure.
· Secured creditors are paid first (for example, before tax claims and employee claims) when a business is liquidated.
· Secured creditors are subject to an automatic stay on enforcement procedures when a debtor enters a court-supervised reorganization procedure, but the law protects secured creditors’ rights by providing clear grounds for relief from the automatic stay (for example, if the movable property is in danger) or setting a time limit for it.
· The law allows parties to agree in the collateral agreement that the lender may enforce its security right out of court; the law allows public and private auctions and also permits the secured creditor to take the asset in satisfaction of the debt.
How do you take into account economies' legal tradition and their big cities?
The strength of legal rights index measures whether certain features that facilitate lending exist within the applicable collateral and bankruptcy laws. The indicator is aimed at capturing the actual effect of legal provisions, regardless of how they are framed under the legal tradition of each economy. For example, in looking at the registration of rights over movable property, Doing Business captures whether it takes place in separate registries for incorporated and non-incorporated entities, at the local court of first instance where the debtor is located or at the commercial registry for both incorporated and non-incorporated entities. Thus, Doing Business takes into consideration civil law and common law traditions when examining the laws of the different economies.
The ranking of economies on the ease of getting credit is determined by sorting their distance to frontier scores for getting credit. For the 11 large economies for which Doing Business covers two cities, the distance to frontier score is a population-weighted average for the two cities.
What is a functional approach to secured transactions?
To minimize the potential for secret liens (rights not appearing on record and therefore unknown to prospective creditors), good practice calls for adopting a functional approach to secured transactions—through legislation that covers “all rights in movable assets that are created by agreement and secure the payment or other performance of an obligation, regardless of the form of the transaction or the terminology used by the parties” (1). The publicity of these rights would then need to be ensured through the preferred mechanism of registration.
What type of security interests do you take into consideration in assesing the functional approach to secured transactions?
In the functional approach to secured transactions, all rights in movable assets that are created by agreement and that secure the payment or performance of an obligation, regardless of the type of transaction or the terminology used, are considered to be functional equivalents to traditional types of securities. The functional equivalents that Doing Business takes into account are the following:
· Fiduciary transfer of title—involving the transfer of ownership for security purposes until the debt is extinguished. The debtor may retain possession of the assets.
· Financial lease—involving a monetary loan used by a company to purchase equipment for its business. The lease agreement guarantees the use of the equipment in exchange for regular payments from the debtor for a specified period.
· Assignment of receivables—involving the creation of a security right in receivables that secures the performance of an obligation.
· Sale with retention of title—involving an agreement between the buyer and the seller according to which the asset is not transferred to the buyer until full payment of the purchase price.
What kind of rights can secured creditos have during an automatic stay on enforcement when a debtor enters a court-supervised reorganization procedure?
While secured creditors must stop all collection actions during an automatic stay, their rights should remain protected. To ensure the protection of secured creditors’ rights during the automatic stay, the laws of an economy need to prescribe a time limit for the stay and stipulate a relief from the stay when the collateral is not needed for the debtor’s reorganization or when the stay poses a great risk to the existence of the collateral (such as for perishable goods). Moreover, the laws should allow insolvency representatives to provide additional or substitute assets to compensate for the diminution of value of the encumbered assets due to the stay.
Can you give us an example of an economy that recently reformed in the Getting Credit–Legal Rights area?
Jordan strengthened access to credit by introducing a new secured transactions law, by setting up a new collateral registry, and by introducing amendments to the insolvency law. The new laws implemented a functional secured transactions system, broadened the scope of assets that can be used as collateral, and provided a time limit and clear grounds for relief from the automatic stay for secured creditors during reorganization procedures. On April 3, 2019, the collateral registry became operational. It is unified (linked geographically), searchable by a debtor’s unique identifier, modern, and available online to the public for registration, modification, cancellation and searches. It is also notice-based and functional equivalents are required to be registered therein.
Does the Getting Credit - Legal Rights index record the de jure (the law) or the de facto (the practice) situation?
The methodology of the getting credit–legal rights indicator set looks primarily at laws and regulations (de jure) in order to evaluate legal rights of debtors and creditors. The methodology measures whether the law gives enough protection to secured creditors by allowing them to verify if an asset which is being considered for a collateral is clean of any prior liens, whether secured creditor can verify such information through a collateral registry and whether the law assures priority of secured creditors who registered their collateral in the registry. The methodology also measures how the law protects secured creditors in case of debtor’s default and in bankruptcy proceedings, whether the law provides for an automatic stay against enforcement of creditors’ claims but also whether the law grants relief of time and relief for perishable assets or assets which are not of immediate need for the business under restructuring. Another feature that the methodology measures is the scope of assets that a debtor can use as collateral, including functional equivalents to security interest on top of traditional pledge.
As far as operations of the collateral registry is concerned, the getting credit–legal rights methodology looks at both the law establishing the collateral registry, accompanying regulations, but also at what in practice (de facto) can be registered in the collateral registry, whether four functional equivalents like fiduciary transfer of title, financial leases, retention-of-title sales and transfer of receivables can and are required to be registered. The methodology evaluates operations of the collateral registry nationwide, whether it covers security registration from all locations in a given economy, whether such registration can be done online instantly, whether modifications, cancelations and searches by debtor’s name can practically be done online or are there any restrictions (for example, only notaries can perform such acts) or technological difficulties.
When are reforms related to The Getting Credit - Legal Rights indicator taken into account?
The strength of legal rights index tracks changes related to secured transactions and insolvency every year. Depending on their impact on the data, certain changes are classified as reforms and listed in the summaries of Doing Business reforms in 2018/19 section of the study in order to acknowledge the implementation of significant changes. For a secured transactions law to be fully implemented and counted as a reform by Doing Business, a collateral registry where security interests in movable assets can be registered must be in place.
- What is your indicator designed to measure?
- How is coverage calculated?
- Can you give us an example of an economy that recently reformed in this area?
- Does the getting credit–credit information index record the de jure (the law) or de facto (the practice) situation?
What is the indicator designed to measure?
The depth of credit information index measures rules and practices affecting the coverage, scope and accessibility of credit information available through either a credit bureau or a credit registry. A score of 1 is assigned for each of the following eight features of the credit bureau or credit registry (or both):
· Data on both firms and individuals are distributed.
· Both positive credit information (for example, original loan amounts, outstanding loan amounts and a pattern of on-time repayments) and negative information (for example, late payments and the number and amount of defaults) are distributed.
· Data from retailers or utility companies are distributed in addition to data from financial institutions.
· At least two years of historical data are distributed. Credit bureaus and credit registries that erase data on defaults as soon as they are repaid or distribute negative information more than 10 years after defaults are repaid receive a score of 0 for this component.
· Data on loan amounts below 1% of income per capita are distributed.
· By law, borrowers have the right to access their data in the largest credit bureau or registry in the economy. Credit bureaus and credit registries that charge more than 1% of income per capita for borrowers to inspect their data obtain a score of 0 for this component.
· Banks and other financial institutions have online access to the credit information (for example, through a web interface, a system-to-system connection or both).
· Bureau or registry credit scores are offered as a value added service to help data users assess the creditworthiness of borrowers.
The index ranges from 0 to 8, with higher values indicating the availability of more credit information, from either a credit bureau or a credit registry, to facilitate lending decisions. If the credit bureau or registry is not operational or covers less than 5% of the adult population, the score on the depth of credit information index is 0.
How are credit registry and credit bureau coverage rates calculated?
Credit bureau coverage reports the number of individuals and firms listed in a credit bureau’s database as of January 1, 2018, with information on their borrowing history within the past five years, plus the number of individuals and firms that had no borrowing history in the past five years but for whom a lender requested a credit report from the bureau in the period between January 2, 2017, and January 1, 2018. The coverage rate is a percentage of the adult population (the population aged 15 and above in 2017 according to the World Bank’s World Development Indicators). A credit bureau is defined as a private firm or nonprofit organization that maintains a database on the creditworthiness of borrowers (individuals or firms) in the financial system and facilitates the exchange of credit information among creditors. (Many credit bureaus support banking and overall financial supervision activities in practice, though this is not their primary objective.) Credit investigative bureaus that do not directly facilitate information exchange among banks and other financial institutions are not considered. If no credit bureau operates in the economy, the coverage value is 0.0%.
Credit registry coverage reports the number of individuals and firms listed in a credit registry’s database as of January 1, 2018, with information on their borrowing history within the past five years, plus the number of individuals and firms that had no credit history in the past five years but for whom a lender requested a credit report from the registry in the period between January 2, 2017 and January 1, 2018. The coverage rate is a percentage of the adult population (the population aged 15 and above in 2017 according to the World Bank’s World Development Indicators). A credit registry is defined as a database managed by the public sector, usually by the central bank or the superintendent of banks, that collects information on the creditworthiness of borrowers (individuals or firms) in the financial system and facilitates the exchange of credit information among banks and other regulated financial institutions (while their primary objective is to assist banking supervision). If no credit registry operates in the economy, the coverage value is 0.0%.
Can you give us and example of an economy that recently reformed in the Getting Credit –Credit Information area?
In pursuance to CB Law No (15)-2010 “the Credit Information Law for the Year 2010,” a new credit bureau, CRIF–Jordan, was licensed on December 15, 2015, and began operations on October 3, 2016. As of January 1, 2017, CRIF–Jordan had a coverage of individuals and firms above 5% of the economy’s adult population. Its credit reports include both positive and negative credit information. The credit bureau does not impose a minimum loan size for loans to be included in the database. Finally, Article 20 of the Central Bank Law No. 15 of 2010 guarantees that borrowers can inspect their own data in the credit bureau.
Another example is Kuwait where the Credit Bureau, CI-Net, started offering consumer and commercial credit scoring for banks and financial institutions to assess the creditworthiness of borrowers on April 1, 2019. The credit scoring algorithm uses the payment history for the past 24 months, the types of credit used, and the total debt/credit used ratio to calculate a score on a scale from 60 to 960 with 960 representing the lowest borrower risk, while a score of 60 represents the highest.
Does the Getting Credit–Credit Information index record the de jure (the law) or de facto (the practice) situation?
The depth of credit information index mainly records the practice in terms of credit information sharing and reporting by a credit bureau or a credit registry. Nevertheless, the indicator also analyzes laws and regulations that affect the coverage, scope and accessibility of credit information. For example, a point is obtained in the index if, by law, borrowers have the right to access their data in the largest credit bureau or registry in the economy.
