Thesis DefenseTitle: The Effect of Creditor Rights and Information sharing on credit developments in Albania

By Zaim LaktiMentor Arjan Kadareja Ph.D.

Tirana, 23 July 2015

Outline

1. Introduction2. Property Rights3. Creditor Rights4. Enforcement of Court Decisions 5. Public Credit Registry6. Conclusion

1. Introduction

• Developing and poor countries suffer from the low crediting for their economies

• Not enough founds?!• Two main factors:

1. Low Creditor Rights2. High Degree of asymmetric information

• Two economic theories:1. What matters for private credit is the power of creditors

(More easy to: force repayment, grab collateral, gain control over the firm …)

2. What matter for lending is information(More easy to track creditor history: Public Credit Registry)

• Methodology: Simulation methods of the effect of creditor rights and Public Credit Registry introduction in 2008 in order to measure the scale of this effect on private credit. The model is taken from La Porta, Lopez-de-Silanes (1997) and S. Djankov el.al (2007) studies.

The initial empirical strategy is to run cross-country regressions that explain the private credit to gross domestic product (GDP) ratio in terms of creditor rights and the presence of registries

2. Property Rights• In post-communist Albania a long series of legal instruments were

enacted• (restitution/Compensation of confiscated properties during the communist period)

• In 2014 Albania became an EU candidate country and still property rights are week• (European Court of Human Rights (ECtHR4) has already found serious deficiencies of the judicial and

administrative system of the country in respect of property restitution and compensation of former owners.)

• To measure the property rights we rely on Property Rights Index (PRI)• A subcomponent of the Index of Economic Freedom, the property rights index measures the

degree to which a country’s laws protect private property rights, and the degree to which its government enforces those laws.

• Albania saw a steadily increasing IPRI (International Property Right Index) over the course of the past four years.

• A higher Property Right Index would lead to a higher degree of crediting• (For lenders it is very crucial to be sure that they will reposes the debtor assets in case of the

default, or bankruptcy for companies)

3.0 Creditor Rights• “Credit”- any legal undertaking to disburse a sum of money, in exchange for a

right to repayment of the amount disbursed and outstanding and to payment of interest or other banking commissions on such amounts as well as any extension of the due date of a debt security or other right to payment of a sum of money.

• “Recovery rates”-Lenders depend on recovery rates in the event of a default which is the ability to repossess collateral and to reorganize debtors, depend largely on the legal rights that creditors have in reorganization and liquidation procedures

• Albanian Laws which define who controls the insolvency process and who has rights to the property of a bankrupt firm and with what priority are:1. Civil Code, Law no. 7850, dated 29.7.1994 as amended, 2. Procedural Civil Code, Law no. 8116, dated 29.3.19963. “On security charges” Law no. 8537 dated. 18.10.19994. “On the private bailiff service.” Law no. 10031 dated. 11.12.2008

3.1 Creditor Rights• Based on Djankov’s method we study reforms of bankruptcy law in Albania

from 1992-2015 and try to make a simulation of the effect of creditor rights on private credit by answering four questions for each reform: 1. Are secured creditors able to seize their collateral one reorganization petition is

approved? 2. Are there any restrictions such as creditor consent when a borrower files for

reorganization, as opposed to debtors seeking unilateral protection from creditors’ claims by filling for rehabilitation?

3. Are secured creditors paid first out of the proceeds of liquidating a bankrupt firm or if third party claims take priority?

4. Are creditors or an administrator are responsible for running the business during reorganization, rather than having the debtor continue to run the business?

• There have been three reforms in bankruptcy law, in 1992, 1995, 2002 as amended in 2008-2009, and currently there are some debates going on for amending again the law of 2002 to make it more social oriented.

3.2 Creditor Rights• Based on Djankov’s method we study reforms of bankruptcy law in

Albania from 1992-2015 and try to make a simulation of the effect of creditor rights on private credit by answering four questions for each reform:

3.3 Creditor Rights: Simulation of Creditor Rights on private credit in Albania

• We rely on the methodology of La Porta, Lopez-de-Silanes (1997) updated with the study of Djankov, McLiesh, Shleifer (2006) to simulate creditor rights on private credit. In the case of Albania we compare Creditor Rights Index between 1995 and 2002 referring to table 5 of the Djankov, McLiesh, Shleifer (2007).

• The effect of creditor rights on private credit will be based on the dependent variable: private credit to GDP, in Table 5 of Djankov, McLiesh, Shleifer (2007) where the average is 6 % GDP for the change of 1 point in the variable of Creditor Rights constructed from the bankruptcy reforms in Albania (Table 2).

• From table 3 we have a change in 1 point from 1995 to 2002 and from table 5 we have an average of 6 % private credit to GDP. 1 points x 6 % = 6 % of private credit to GDP in Albania is effected by bankruptcy law reform of 2002.

• The bankruptcy law reform of 2002 effected private credit by 6 % to GDP. This means creditor rights plays a significant role in Albania.

4. Enforcement of Court Decision

• Another crucial factor on lending process is the timeframe in which creditors are able to repossess the debtor’s assets which are putted as collateral.

• Judicial system in Albania suffer from long time trials, corruption, unprofessional experts and difficulties in enforcing court decisions.

• Externalities of technology development (BitCoin)• Debt Collection Procedures…• A study of OSBE has found that in 2013 in all civil lawsuits in first instance

courts the average time of Examination is 279 days.• Appeal Court of Tirana has 4026 cases compare to all Appeal Courts that

have 6589 cases. Average time of examination for a case in 2014 is 270 days compare to 2012 where 70% of the cases were examine from 2-6 months.40 But, there are also some cases over 2-4 year pending in Supreme Court.

• As short the time of termination for court decisions is, as quickly creditors re-poses the collateral. Therefore, it effects positively private credit because creditors will be more willing to give founds.

5. Public Credit Registry

• When lenders know more about borrowers, their credit history, or other lenders to the firm, they are not as concerned about the lemons problem of financing nonviable projects and therefore extend more credit.

• Public credit-registries are databases managed by a government agency, usually the central bank or the superintendent of banks that collect information on the standing of borrowers in the financial system and make it available to actual and potential lenders.

• Dependent variable is the introduction of Public credit Registry. Before 2008 it was 0 and after the introduction it became 1. We simulate the effect on Albanian private credit of the public Credit Registry. For this we use the Table 642 of the result in the study of S. Djankov st.al. (2007), the parameter is 9.9 which means the Public Credit Registry increase credit by 9.9 % of GDP on average.

• Therefore, 1x9.9%= 9.9% of private credit to GPD is the effect of the introduction of Public Credit Registry in Albania.

6. Conclusion

• Our main hypothesis was that Creditor Rights and information sharing (Public Credit Registry) in developing countries has a significant effect on private credit.

• We founded that strong Property Rights increase the willingness of creditors to lend money; Bankruptcy Law reforms have effected positively creditor rights through years; Directives of the European Parliament and of the European Council are a must for Albania to adapt and transpose; enforcement of Court Decisions including debt collection procedures need improvement because trials take too long and debt recovery is not easy to archive; the introduction of Public Credit Registry on 2008 effect very positively the private credit sector .

• From the first simulation we showed that bankruptcy law reform of 2002 effected private credit by 6 % to GDP. This means creditor rights plays a significant role in Albania. We have to see the draft-proposal to make any prediction about its effect on private credit. While from the second simulation we founded that the effect of the Public Credit Registry in 2008 effected private credit to GPD by 9.9%.

• We should focus more on increasing Creditor Rights and making Public Credit Registry more transparent and effective.

Thank you

• This presentation provides general information related to the law and does not provide legal advice. We recommend you consult a lawyer if you want legal advice.

• For legal advice contact: • Zaim Lakti

lakti.z@gmail.com