A new report from the International Finance Corp. (IFC) and the World Bank highlights the deficiencies of financial infrastructure in emerging markets. Improving that infrastructure on several fronts, the report suggests, would cut costs, facilitate collateralized lending and spur transactions such as remittances.
These are often precursors to a mature securitization industry.
The areas covered by the report include credit bureaus, enforcement of collateral and functioning payment, securities settlement, and remittance systems.
In one compelling illustration of the tremendous impact of better infrastructure, a registry set up in the People’s Republic of China for security in accounts receivable has spurred secured lending.
“According to reports from the country, twenty months after the on-line registry began operation, there had been nearly 75,000 lending transactions using receivables as collateral registered in the registry,” the report said. The loans aggregate value totalled over CNY5 trillion ($732 billion), and a registry is now in the works for finance leases.
Already widely securitized in emerging markets, remittances as well stand to make staggering gains from more efficient payment systems. The yawning gap between less and more efficient remittance “corridors” shows how much room for improvement exists in the former group.
“One of the least efficient remittance corridors is South Africa to Zambia, which costs $49.81 per $200 sent,” the report said. “Compare this to sending money to Pakistan from nearby Saudi Arabia where the fee is only $5.00 per $200 – a difference of 90%.”
Another area severely lacking in a number of emerging markets is the establishment and functioning of a credit bureau, which also have a role to play in anchoring a securitization industry. Even simple credit reporting can make a meaningful difference. The report said that one study found that within six months of a credit bureau opening in the Guatemalan microfinance sector, default rates slid by one-to-three percentage points. A drop of that size corresponds to 2.5-percentage-point reduction in interest rates in a competitive market, the report added.
The authors are Penelope Brook, acting vice president of the financial and private sector development of the World Bank Group, and Peter Stein, manager of access to finance advisory of the IFC.
The report culled data from the World Bank’s Doing Business project, the Global Payment Systems Survey and database of worldwide remittance prices; along with the IFC’s lending portfolio.