Orderly debt resolution processes are critical for businesses of all sizes, aiding financial stability, new investment flows, and the value of contracts and contract law. These processes will be especially important given the severity of the COVID-19 pandemic and global recession. The COVID crisis coincided with almost a decade of rising debt and a sharp decline in investment in 2020, particularly in emerging markets and developing economies (EMDEs). As the crisis lengthened, it deepened the damage to businesses and consumers and their ability to make payments and service debts.
A new revision to the World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes (ICR) is focused on helping policymakers build and improve the insolvency and bankruptcy systems that support micro, small and medium enterprises (MSMEs). The previous update to the Principles incorporated lessons learned from the complex issues that triggered the 2008 global financial crisis, while this latest update addresses the specific challenge of making insolvency systems more accessible for MSMEs which have been particularly hard hit in this crisis.
MSMEs represent over 60% of private sector employment globally and need efficient, cost-effective and nimble ICR systems in order to successfully restructure or exit the market. As MSMEs fall into financial difficulty, many face unique challenges dictated by their small size. ICR systems that do not recognize these challenges, and that are too costly or bureaucratic, make it difficult, if not impossible, for small businesses to use either out of court workouts or more formal tools to reorganize.
The pandemic’s impact on banking systems will be a particular challenge. As non-performing loan (NPL) levels increase, banks can experience shrinking profits. In the extreme, this can lead to bank failures, with systemic risk to a country’s overall financial sector. In this context, sound ICR systems provide important tools to work out rising volumes of NPLs, maximize creditor recovery and put capital back to work in productive enterprises. Even in times of economic prosperity, robust ICR frameworks are positively associated with lower cost of credit; an increased availability of credit; increased returns to creditors; job preservation through efficient restructuring tools; and the promotion of entrepreneurship and venture capital—fundamentals all positive for private sector development and economic growth.
The work to develop these new principles has taken place under the auspices of the World Bank’s role as the Financial Stability Board joint standard setter (together with the United Nations Commission on International Trade Law) on this topic. It reflects ongoing collaboration between the World Bank and its ICR Task Force, which brings together other multilateral development banks, international organizations, expert industry bodies and experts around the world from developing and developed jurisdictions. On behalf of the World Bank Group, let me thank all of the experts of the ICR Task Force who have so generously given their time and energy to help these principles work effectively across countries and legal systems.
The World Bank Group