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Collateral
The credit that is required for the growth of a modern market economy must come from the private sector. Collateral Law provides the legal basis for extension of credit, which, when properly constructed, permits creditor to reduce their risks, lower costs, and increase credit availability to borrowers of all sizes. It is not generally one law, but rather a collection of private and public laws which include contract, property, commercial, company assets, judicial process, the code of civil procedure, bankruptcy, foreclosure, judicial sale, land registration, and movable property registration, among others. Although Collateral Law may be codified into a single act, including laws on registration, this is not required. Codification is useful (and courts are generally more comfortable with such an organized framework), but it is most important that the related laws are complementary and consistent with each other.
Countries that do not have modern systems of law to facilitate credit granting will find that their producers are not competitive with producers in other countries that have such laws because they either cannot get credit to expand, improve productivity, or enable them to trade more effectively or because the credit that is available to them is much more expensive. Under existing law, Serbia and the FRY cannot be competitive.
This situation can be rectified, as is being done in other former Yugoslav republics and other transition economies, through adoption and implementation of Collateral Law and practices designed to facilitate “asset-based” financing and, thereby, encourage a much higher level of secured financing. Asset-based financing reduces the risk of loss on a loan due to default by allowing the creditor to “secure” the indebtedness in whole or in part through a right of pledge on the assets of the borrower. This provides an alternative source of repayment should the debtor fail to meet contractual obligations, as well as a strong disincentive for non-payment by the debtor, because assets subject to a pledge can be seized and sold and the proceeds of sale can be applied to the undischarged portion of the obligation.
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