Legal Policy and Ramifications for Rural Finance
Theme Paper: “Legal and Regulatory Requirements for Effective
Rural Financial Markets”
by Heywood W. Fleisig and Nuria de la Peña, Center for the
Economic Analysis of Law
Abstract
Many otherwise well-designed donor and IFI programs that support
the expansion of rural finance founder because they are inconsistent
with the laws and regulations of the recipient country. This paper
explores common legal and regulatory obstacles to successful projects
and discusses strategies for building legal reform into the design
of such programs.
In the provision of credit, the most important legal feature in
a country is its system for collecting debts: where debt collection
systems are weak, private lenders are naturally reluctant to lend.
The paper first discusses what laws and institutions form the key
elements of a system of debt collection. It looks at this framework
for both unsecured (no collateral) and secured (collateral) loans.
It examines the laws required to link secured lending to unsecured
lending and to establish links among bank, non-bank financial, and
non-bank, non-financial creditors. It examines the use of movable
property and real estate as collateral for loans.
The paper then turns to a number of other legal and regulatory
barriers to rural development, that are linked in different degrees
of proximity to rural finance. These include homestead exemptions,
scope and coverage of the civil registry, age of majority restrictions
on contract signature, provisions in the commercial code for formalizing
business, problems in the judicial system, contract enforcement,
problems in land titling procedures, bankruptcy, the right to vote,
and voter registration.
The paper concludes with a review of options for dealing with
legal and regulatory issues in the context of rural finance and
rural development operations.
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