Credit Markets, Creditors Rights and Economic Development

This working paper is part of a book on law and economic development. It explores the relationship between credit markets, creditors' rights and economic development. The paper makes the following statements:

• Privately owned banks are vulnerable to directed lending, crony capitalism, related lending and problems related to corporations;
• The ‘law on creditors' rights and the ‘'bankruptcy law' affect the strength of the financial sector in the credit arena;
• Efficient bankruptcy procedures can enhance the willingness of creditors to lend and can make the exit of doomed firms faster and less damaging to creditors;
• The greatest barrier to greater use of credit in developing countries is making collateral legally available for secured lending;
• Facilitating greater use of secured credit involves establishing substantive law supporting pledges of movable property and establishing collateral registries;
• An important issue for the creation of a strong financial sector involves the kinds of property in which a creditor can obtain a security interest.

The paper concludes that:

• The less financially developed an economy is, the more important is the improvement in secured transaction law, as opposed to bankruptcy law;
• Credit registries play an important role in credit markets by facilitating the sharing among creditors of information concerning borrowers.