Columbia Business School Professor Predicts How Changes In Banking Laws Could Fuel Emerging Economies Of Tomorrow

New study/research tracks emerging countries' economic activity after law changes and finds a boost in access to credit; increase in employment rate; increase in productivity and sales for firms

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Columbia Business School

Sep 25, 2014, 08:00 ET

NEW YORK, Sept. 25, 2014 /PRNewswire/ -- Many businesses in places such as Latin America, and Asia are struggling right now to obtain bank financing due to lack of sufficient collateral. In these places, banks are usually reluctant to accept "movable property" as collateral. But a Columbia Business School study finds that the use of this type of collateral—vehicles, machinery, inventory and accounts receivables—has widespread economic impacts for emerging markets and could strengthen economic performance and job growth.

The United States and other highly developed countries' banks traditionally accept movable property as part of their lending agreements and track said property through a universal, public computerized registry that notes the name of the lending bank, name of company, and serial number of the asset. But in emerging markets, movable property is usually not accepted because collateral laws are cumbersome and it is very difficult to track the property, making it hard for banks to know if the asset has been pledged to back a loan at another bank.

"Traditionally the only type of property that can be used as loan collateral in emerging economies is real estate, which can be quite scarce," said Mauricio Larrain, assistant professor of Finance and Economics at Columbia Business School. "But if banks in emerging countries began to accept movable property – a commodity far more common than real estate – as collateral for loans, access to credit would increase and the economic impacts would be transformational."

The study showed that accepting movable property would have benefits for the emerging country, the company borrowing, and the bank making the loan. Comparing firms with different usage of movable assets, the findings of the study include:

Employment rate increased by 4%
Productivity of the firms increased by 5%
Sales of the products increased by 9%
Investment rate in fixed assets increased by 3.5%

The Research

The study titled, "Enlarging the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity," is authored by Larrain and Murillo Campello of Cornell University.

The paper looked at emerging economies in Eastern Europe over a ten-year period that have implemented new laws that allow borrowers to pledge movable property. In order to see if these laws were effective, the researchers documented the countries' economic status before and after the law change. The countries studied include: Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, and Romania.

"From a policy perspective, we think the paper's numbers inform other emerging countries about the large benefits of these law changes," said Larrain. "One challenge moving forward would be for these developing countries to introduce computerized collateral registries and to allow and encourage the acceptance of movable property as loan collateral."

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

About Columbia Business School

Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School's transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School's faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School's efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School's position at the very center of business, please visit www.gsb.columbia.edu.

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SOURCE Columbia Business School