In Conversation with Marek Dubovec: How Modernizing Credit Infrastructure Benefits Women in Emerging Economies

May 8, 2023

Dr. Marek Dubovec is the Director of Law Reform Programs at the International Law Institute, as well as Professor of Practice at the University of Arizona’s James E. Rogers College of Law. Recognized for his international expertise in commercial law reform and especially secured transactions, Marek works with governments, policymakers and regulatory bodies to draft and implement laws and standards for countries around the world to help modernize commercial law frameworks in an effort to enable greater access to credit and financial inclusion.

Women’s World Banking recently connected with Marek to discuss how reforms to credit infrastructure and secured transactions frameworks, including electronic registries and a shift toward movable collateral, can benefit financial institutions while providing more opportunities for economic empowerment to women entrepreneurs in emerging economies.

Q: Can you explain how credit infrastructure plays a crucial role in promoting women’s financial inclusion and empowerment, especially in emerging markets?

Credit infrastructure is an aspect of the overall system that facilitates broader objectives, such as financial inclusion as well as more specific objectives, like increasing access to credit. The legal and regulatory framework governing credit infrastructure relies on the underlying set of laws that govern property, business associations, contract farming and others. A modern credit infrastructure framework is agnostic as to the types of borrowers, their gender, industry, etc. However, such framework has not yet delivered all of the expected benefits, including greater economic empowerment for women. We need to redefine the perimeter of the credit infrastructure framework and address underlying issues, such as whether women (still the case today in certain jurisdictions) are permitted to own property, enter into contracts or form a business.

Q: How can credit infrastructure programs and policies be designed to meet the unique needs of women entrepreneurs and business owners in emerging markets?

The design must start from the top when, for instance, the national financial inclusion strategy is formulated. In turn, that informs the specific interventions, including those within the credit infrastructure. It’s critical that people who face barriers are heard and that their challenges are translated into specific recommendations to address these barriers. Countries have deployed various support programs tailored to address certain issues, such as credit guarantees, but I think we need to give more thought to designs that provide incentives to financial institutions that work to specifically empower women entrepreneurs.

Q: In your opinion, what are some of the successful credit infrastructure programs or initiatives that have specifically progressed women’s financial inclusion?

We know about the promise as well as the challenges of microfinance, as championed by Muhammad Yunus. In reality, it is quite challenging to demonstrate the actual impact of various credit infrastructure programs on women entrepreneurship. Only recently, collateral registries included a mandatory field that require lenders to indicate whether the business getting a loan is majority-owned by women. We seem to still be in that initial phase of collecting gender-disaggregated data and figuring out which solutions may be most effective. Some evidence is slowly emerging. For instance, when Ghana launched its collateral registry over a decade ago, it gave women entrepreneurs a choice between microcredit and secured loans. Most women chose secured loans, as those credit products gave them more power to control the risk, which is individualized unlike in a group microlending structure.

Q: Movable collateral has been identified as a key factor in increasing access to credit for women entrepreneurs and business owners by helping to close the gap between assets owned by women and collateral traditionally required by lenders (e.g., land). What steps can policymakers and regulatory bodies take to support the use of movable collateral in increasing women’s financial inclusion, and how can they address potential challenges related to short- and long-term effectiveness?

As I mentioned earlier, commercial laws and related regulations are typically agnostic as to the gender of the borrower. There’s a general lack of awareness and knowledge around creating secured credit products that would increase women’s financial inclusion. Financial institutions in developing markets have been accustomed to extending loans on the security of motor vehicles and land, but lack expertise in designing business-enabling products. More capacity building is needed for the financial institutions to understand the opportunities and become comfortable with the newly reformed legal frameworks and electronic registries. Frequently, lending activity picks up after the financial institutions have seen how local courts have interpreted and applied the new legislation, which may take several years.

Q: Can you explain how reforms to secured transactions frameworks and electronic collateral registries drive international coordination? What are some specific benefits of a uniform system for women entrepreneurs in particular?

Uniformity benefits all types of borrowers. It is a feature that makes the credit infrastructure more attractive to foreign lenders and increases competition. For women entrepreneurs, a uniform system allows the credit products tailored to their specific needs successfully deployed in one economy to be more easily deployed in other economies with equivalent or harmonized legal infrastructure, thus extending those financial benefits to more women.

Q: What steps can be taken to modernize secured transaction frameworks and collateral registries? Additionally, what should governments consider when addressing challenges that have been identified related to electronic collateral registries in emerging markets (e.g., internet access, electricity, data privacy, etc.)?

During implementation, I have heard and read about concerns that accessing collateral registries only by electronic means would be counterproductive to financial inclusion (e.g., in Ethiopia). Post-implementation, I have not heard about such challenges in any of the economies where I helped set up collateral registries accessible electronically only, including Liberia and Sierra Leone. However, policymakers should consider ways to address the “identification problem” as many prospective borrowers lack some formal evidence of their identity, which often complicates due diligence and verification of their creditworthiness.

Q: How might intangible movable collateral, like accounts receivable or intellectual property (IP) and the revenue that it generates, be helpful in enhancing lending access for women in emerging markets?

There is very little IP financing in emerging economies, and several international financial institutions are supporting projects to develop such financing. When I was attending an UNCITRAL meeting in 2021, some of these issues were on display. An observer mentioned that lenders should be encouraged to look beyond the traditional types of collateral. She provided an example of a women entrepreneur who operates an eatery where she serves homemade meals from family recipes. The recipe is the most valuable asset of that entrepreneur, but how does one design a credit product around that asset?

Q: In what ways can credit infrastructure reforms around insolvency/debt resolution impact financial inclusion, and how might these enhanced frameworks benefit women looking to access credit?

Insolvency frameworks are being reviewed as to whether they facilitate restructuring of MSMEs, many of which are owned by women, at a reasonable cost. The cost of such proceedings has so far been prohibitive for these types of businesses. The first question a prospective lender should consider is not whether registration can be done electronically, but how much it is likely to recover in insolvency. Enabling effective insolvency/debt resolution systems should be at the top of policymakers’ agendas.

Q: How can the different players involved in working to ensure that credit infrastructure is inclusive to women, especially those in marginalized communities, collaborate most effectively?

Achievement of that overarching goal to facilitate financial inclusion for women is predicated on several levels of collaboration and coordination. Policymakers and financial institutions must collaborate to lay an enabling credit infrastructure framework. This has been happening for the decade-plus that I have been involved in access to credit reform projects—none of which proceeded without the direct involvement of financial institutions. Policymakers have been attentive to institutions’ concerns and working to prescribe solutions to the challenges. Another type of collaboration that’s crucial but often overlooked is that between policymakers and regulators. We have promoted reforms of secured transactions laws, but financial institutions remain uncertain on whether their licenses enable them to offer particular types of products. We should not expect reforms of commercial law frameworks to significantly increase access to credit unless the regulatory framework is properly coordinated.

Thank you, Marek, for your time and insights!