Financial Law
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Overview
The financial crisis in 2008 underscored the need for a sound, efficient and predictable legal and regulatory framework for access to finance and for the continuous support of the SME sector in the face of liquidity constraints in the economies we invest in. Since the financial crisis, innovative financial services have dis-rupted financial markets through technological solutions, which post unique challenges for regulators and policy-makers in EBRD's regions as they combine financial services with information technologies.
The LTP's role
The EBRD has a well-established record of accomplishment working on law reform in areas promoting access to finance. Our past work has mainly consisted of assisting in the development of legal and regulatory systems for secured credit, strengthening the security package (in the form of pledges and mortgages), supporting the development of different agricultural financing products, exploring alternative financial structures, such as leasing and factoring and contributing to the development of legal and regulatory frameworks for financial technologies (FinTechs).
Building on the positive past experience and being in a position to cross-pollinate knowledge and expertise, we are continuing to explore well established as well as innovative financial products. We hope these efforts will assist economies EBRD invests in bridging some transition gaps that still exist in this area and in modernising their legal frameworks.
Receivables Finance
The EBRD is actively involved in exploring the potential for greater use of receivables, whether as part of factoring, reverse factoring or as security for loans. Receivables are one of the most important assets for MSMEs. However, receivables are sometimes not accepted by banks as collateral for loans or cannot be sold or otherwise used by MSMEs to access working capital. The New Finance Support Report to be launched at the 23rd Receivables Finance Convention in May 2023 in London, highlights the potential for the development of reverse factoring/ supply chain financing and loans secured by multiple receivables in the EBRD regions. The report proposes a roadmap for policymakers in the EBRD regions to unlock receivables-based finance without substantial legal reform.
Agricultural Finance
Farmers in EBRD regions often face difficulty in obtaining financing due to their inability to provide creditors with acceptable collateral. Most common types of collateral, such as land and/or machinery, are usually not available for short term finance. In the pre-harvest stage of production, this often exposes farmers to expensive and usually non-competitive financing schemes offered by input suppliers or compels them to make hard choices as to what investment they can afford. Insufficient liquidity leads to underinvestment in the agriculture sector, resulting in lower levels of productivity and less profit (whereas high quality inputs increase productivity). Post-harvest, only a robust system of public warehouses for harvested crops would allow farmers to use the stored crops as collateral. The EBRD has been promoting warehouse and warehouse receipt reforms for many years and began recently promoting an innovative pre-harvest instrument. These efforts have increased as food prices have risen, a trend that highlights the issue of food security and the urgency of helping economies with agricultural financing.
Post-harvest financing - Warehouse Receipts
Warehouse Receipts financing consists of a collateralised commodity transaction where the stored crop provides security for the loan. The financing cycle begins after the harvest. The harvested crop is stored in a licensed warehouse that issues a receipt proving that the commodity is physically in the warehouse, and on the basis of which financing will be extended. The system binds several participants together: farmers (depositors), warehouse owners and managers, banks and the government. The role of the government is to build a legal and institutional framework that ensures the performance of the system and minimises transaction costs.
The Warehouse Receipts financing system gives farmers enhanced access to credit and the possibility of delaying their sales, which allows them to take advantage of the seasonal price fluctuations. Financial institutions gain, through the use of collateral that is easier to enforce and which central banks regard as good quality. This system reduces lenders' capital utilisation requirements, which enables lower pricing.
The EBRD has supported Warehouse Receipts reforms in Bulgaria, Kazakhstan, Lithuania, Moldova, Poland, Romania, Russia, Serbia, the Slovak Republic and Turkey. Reforms are often followed or accompanied by investment projects in which the risk of lending against warehouse receipts is shared between the EBRD and partner financial institutions.
Pre-harvest financing – Crop receipts
In 2010, the EBRD began promoting the use of Crops Receipts. This new instrument originated in Brazil where it has encouraged the private sector to provide US$ 20 billion a year in financing for agricultural activities on a commercial basis.
A Crops Receipts system provides a standardised obligation to supply agricultural products or to make payment in future (to the holder of the receipt), in return for received pre-harvest finance (monetary or in kind). This obligation cannot be altered or evaded under any possible debtor’s defence (force majeure included) and can be incorporated as a tradable paper, further increasing its market value. The obligation is also secured by collateral, in particular collateral over future agricultural products (perhaps those that the financing precisely permitted to grow, but not exclusively). Since 2010 the EBRD has supported Crop Receipts reforms in Russia, Serbia and Ukraine.
Factoring
Factoring is a financial service based on the sale of accounts receivable. It is experiencing a marked revival thanks to the development of more sophisticated legal and technical solutions. Factoring is particularly useful for providing SMEs with access to working capital. Pricing is usually based on the credit standing of the SME’s biggest customers and is thus insulated from the problems commonly associated with SME finance: information asymmetry and lack of appropriate security.
The EBRD has long promoted factoring through the activities of the Trade Facilitation Programme and through its investments in financial institutions. In order to help increase the use of this service, we developed a legal programme that aims to improve the sub-optimal legal and regulatory environment for factoring in the EBRD region.
Under the programme, the EBRD offers technical assistance for the creation of a facilitative legislative environment and an appropriately designed regulatory regime. It also seeks to support the development of local and/or regional reverse factoring programmes.
The below video highlights our work on factoring legal reform and a successfully completed project in Kosovo. It also provides great insight into a project's lifecycle.
Access to finance reform
How a project cycle works.
Factoring Survey in Selected EBRD Jurisdictions (4th Edition)
The fourth edition of the EBRD Factoring Survey gives an overview of the current legal and regulatory landscape for factoring and a snapshot of market practices in ten selected EBRD jurisdictions (Armenia, Egypt, Georgia, Greece, Kyrgyzstan, Morocco, Romania, Türkiye, Ukraine and Uzbekistan), captures changes that have taken place in national laws or practices since 2018 edition of the Factoring Survey and seeks to assess whether these create an enabling environment for market participants to reap the benefits of factoring.
In comparison with the earlier editions of the survey, the fourth edition recognises important trends in digitalisation of the sector, buyer-led supply chain financing, increased emphasis on data protection and examines them in detail. The survey should serve as a useful tool to policymakers looking for a roadmap to enhance companies’ access to finance in their jurisdictions, and market players that are considering establishing its presence in a new market.
2018 Factoring Survey in EBRD regions
This 2018 survey showed that many economies EBRD invests in have started working on or have already introduced specialised laws or specific provisions in general commercial legislation, in order to facilitate factoring operations. However, the development of factoring services and the range of available products differ from country to country, depending on the degree of market sophistication and on the existence of supportive legal provisions.
The survey examined (a) the regulation of factoring as a financial services industry, (b) factoring contracts and (c) other issues related to factoring such as tax, foreign exchange matters and remedies in case of late payments to creditors.
The survey shows a clear inclination towards regulation of factoring in EBRD, with 26 out of 37 reviewed countries having a regulatory body supervising factoring companies in place. The survey also show that the majority of economies that do regulate factoring services do not impose capital adequacy requirements for factoring companies, with only eight being an exception to this. 21 of the 26 countries which have a regulated factoring industry require a specific license to start providing factoring services while in the other cases a simple registration in a designated register would suffice.
Leasing
Leasing is a vital source of investment financing for SMEs and is particularly important in the current context of financial constraints and limited access to credit. Leasing provides financing for vital business assets such as plants and machinery, vehicles, office technology, agricultural and construction equipment, medical equipment and renewable energy generators, among many other assets.
Leasing is particularly attractive for SMEs with scarce financial resources, because it finances up to 100 per cent of the cost of an asset without requiring supplementary guarantees.
In addition, as lessors retain ownership of the leased asset they can provide funding to businesses when other types of lender cannot. The leasing industry is therefore particularly well-placed to support SMEs with high growth potential and start-ups.
The EBRD offers technical assistance with the creation of a modern, facilitative legislative environment for the development of leasing services in our countries of operations. This supports our efforts to promote leasing through the Bank’s investments in financial institutions.
Secured Transactions
A debtor needs to provide creditors with viable security over their assets, whether the debtoris a farmer who needs to borrow money to buy a tractor, an enterprise that needs credit from a supplier or the promoter of a power plant who needs to finance a major new project. Reforms to secured transaction legislation seek to boost the availability of credit, reduce cost and improve the efficiency of the lending market.
A lender or a creditor will take a mortgage or a pledge in order to reduce the risk of losing the money they are owed. If the law or the way in which it is applied does not give creditors confidence that they can recover real value from mortgaged or pledged assets, such a law will have little economic effect.
Conversely, legislation that protects a lender’s rights to debtor assets helps to reduce the risk of providing credit, which increases the availability of financing and improves the terms on which it is available, thereby benefiting the wider economy.
The EBRD helps economies to modernise their collateral laws and offers assistance at all stages of the reform process. We identify what legal reform is needed to achieve an effective legal framework for secured transactions, seek to build a consensus for those reforms and assist in the preparation of the necessary legislation and its implementation.