Does the quality of debt enforcement affect collateral requirements? Evidence from sub-Saharan Africa.

Abstract: Using a dataset of 1,210 loans across 35 sub-Saharan African countries, we study the effect of the quality of bankruptcy codes on collateral requirements. In contrast to earlier studies, we find no significant relationship between the level of creditor protection and the use of collateral. However, the efficiency of bankruptcy procedures is negatively related to both the incidence and degree of collateral. Our results indicate that creditors not necessarily consider the design of a bankruptcy code, but rather appreciate the efficiency of its implementation. Further analysis confirms that these two concepts, design and implementation, are not significantly related to one another. The main takeaway is that when trying to improve the bankruptcy process, governments should mainly focus at improving public institutions' capability to implement regulations and simplifying existing procedures.