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credit_card Getting Credit

This topic explores two sets of issues—the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending. The most recent round of data collection for the project was completed in June 2017. See the methodology for more information.

Frequently Asked Questions

- 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?
- How is coverage calculated?
- Can you give us an example of a country 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?
- Does the Getting Credit – Credit Information index record the de jure (the law) or de facto (the practice) situation?

What is your indicator 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 or inventory), 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 or 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.
  • 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.

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 8 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 2 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 (e.g., 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 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 2 cities, the distance to frontier score is a population-weighted average for the 2 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 types of security interests do you take into consideration in assessing 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 kinds of rights can secured creditors 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.

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, 2017, 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, 2016 and January 1, 2017. The coverage rate is a percentage of the adult population (the population aged 15 and above in 2016 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, 2017, 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, 2016 and January 1, 2017. The coverage rate is a percentage of the adult population (the population aged 15 and above in 2016 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 an example of a country that recently reformed in this area?

Jamaica established a new legal framework to modernize its secured transactions system with the aim of improving the availability of domestic credit to the private sector while minimizing the risk of nonpayment of loans. The Security Interests in Personal Property Act came into force on January 2, 2014, and repealed provisions governing traditional securities under the Agricultural Loans Act, the Bills of Sale Act and the Debenture Registration Act. This new law allows all types of movable assets, present or future, to be used as collateral to secure a loan and establishes a modern, unified, notice-based collateral registry. The Act applies to every transaction that in substance creates a security interest in personal property without regard to the form of the transaction. In implementing the new legal framework, Jamaica has followed a path laid by other jurisdictions with a common law tradition.

Jamaica also saw improvements in its credit reporting system. Two new credit bureaus, having received their license in 2012, started operations in 2013. By January 1, 2014, Creditinfo Jamaica Limited, the credit bureau with the greater coverage, listed 174,402 individuals and 4,354 firms with information on their borrowing history from the previous 5 years. All financial institutions and insurance companies are required to provide data on loans of all sizes to Creditinfo Jamaica Limited. And lenders can now access valuable information on firms and individuals—such as payment history, default information, property information and loan guarantor details.

Creditinfo Jamaica Limited distributes credit data on both individuals and firms, distributes both positive and negative credit information, guarantees the right of borrowers to inspect their data free of charge once a year, records information on loans of all sizes, enables banks and financial institutions to access its data through a secure online platform and since October 2013 has provided credit scores based on its data. Creditinfo Jamaica Limited is also authorized to provide up to 7 years of historical data. But because the credit bureau started to collect live data only in May 2013 and did not receive sufficient historical credit information from data providers when it started operating, it was distributing only one year of historical data as of May 31, 2014.

Another example is Ghana, whose first credit bureau, XDS Data Ghana, started operations in 2010. By January 1, 2014, the credit bureau listed 1,917,144 individuals and 203,534 firms with information on their borrowing history from the previous 5 years. Just as in Jamaica, all financial institutions and insurance companies are required to provide data on loans of all sizes—and the credit bureau enables lenders to access such information as payment history, default information, property information and loan guarantor details on both firms and individuals.

Does the Getting Credit - Legal Rights index record the de jure (the law) or de facto (the practice) situation?

The methodology of the indicator Getting Credit – Legal Rights 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 on-line instantly, whether modifications, cancelations and searches by debtor’s name can practically be done on-line or are there any restrictions, e.g. only notaries can perform such acts, or technological difficulties.

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.

1. UNCITRAL. 2007. Legislative Guide on Secured Transactions. New York: United Nations.