Credit Markets, Creditors' Rights and Economic Development

Abstract:     
Credit markets generate more finance than equity markets, particularly in developing countries. In credit markets the central institution, again especially in developing countries, is the bank. In many such countries, directed lending, crony capitalism, and related lending are key problems. And since banks are corporations, self-dealing involving loans to shareholders, managers, and politically important people is added to the common forms of corporate governance issues.

Initial efforts to analyze credit markets through the lens of legal origin had the shortcoming that the focus was on the law of bankruptcy rather than the law of secured credit. And even within the area of bankruptcy, the focus was on reorganization rather than liquidation, which is more common in both developed and developing countries. The law of secured credit is especially important in countries where mortgages on land are unavailable due to the absence of land titling. Secured credit law is often defective because of the absence of self-help remedies, especially in view of lengthy court delays. Legal origin may be important to the efficacy of creditors rights in developed countries, but there is evidence that it is an unimportant factor in developing countries. The assumption of commonalities within a legal family is doubtful in law pertaining to credit markets, as shown by the sharp differences between U.S. and U.K. bankruptcy law and the many differences in secured credit law found by the EBRD in the transition countries.

Where, as in many developing countries, judiciaries are weak, the law of secured credit is especially important because bankruptcy proceedings are likely to be slow and undependable. In such countries credit registries may, by building on the concept of reputation, provide a partial substitute for judicial proceedings.

Keywords: credit, creditors rights, economic development, secured credit, collateral, bankruptcy, reorganization, liquidation, banks, directed lending, crony capitalism, related lending, corporate governance, legal origin, usury, workout, London rules, credit registries

Working Paper Series