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Serbian law reform boosts small business |
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By Kate Dunn Sipping strong Balkan coffee in a Belgrade hotel of slightly-faded elegance, law professor emeritus Miodrag Orlić mulls over the difficulties he and other reformers faced in erecting the building blocks of a free market economy in Serbia, starting with the banking system. “Back in Tito’s days when Serbia was part of socialist Yugoslavia, credit was considered half-way a gift. Debtors were protected above all, and nobody had sympathy with lenders. This was the cause of much of our economic malheur (pain),” says Professor Orlić, a Supreme Court justice in Yugoslav times. Striking the balance between debtors’ and creditors’ rights is a delicate act. With support from the EBRD and donors, Professor Orlić and other Serbian economic and legal reformers have transformed the system of securing loans through assets pledged as collateral. The new ‘secured transactions’ law protects both trusting bankers from welching clients, and down-on-their-luck borrowers from rapacious creditors. “It’s made a huge difference. We can authorise loans much more quickly than before, with more certainty that the debt is secured by adequate collateral,” says Vladan Radikić, a lawyer with Serbia’s ProCredit Bank. Banks wouldn’t lend “Under socialism, people were told that bankers were evil asset-grabbers,” says Frédérique Dahan, an EBRD law reform expert involved in the Serbian project. “This attitude has endured; judges would refuse to recognise a bank’s right to the collateral pledged against a loan, despite the fact the loan wasn’t being repaid. Therefore bankers were extra-leery about lending, particularly to new clients. It was a stalemate in which the economy could not grow.” “What was needed was a small revolution in people’s minds,” says Professor Goran Pitić, who participated in launching several important reforms as Serbia’s Minister for International Economic Relations from 2000-2004. “There were those who said the capitalists would profit from people’s business tragedies. Such people were not supporters of the market economy which recognises borrowers must take risks in pledging collateral as much as banks must take risks in lending capital.” To speed things up, the new law incorporates features that were unthinkable before: enforcement can, if agreed by the parties, take place outside judicial process, which is quicker and cheaper; lenders can accept a wider variety of assets as security, including inventory and accounts-receivable; when borrowers default, lenders can seize the assets straight away to avoid losing them; and pledges are recorded in an online database. Consult, consult, consult Back in 2001, Professor Pitić’s team developed a transparent and participatory approach to legislating. “Prior to the election in 2000 of the country’s first democratic government, the regime in place did not take public opinion into account when it drafted laws,” says Jelena Perović. As Professor Pitić’s chief legal advisor, she shepherded the drafting process. “Through consultation, we brought in a positive change.” Remembers Professor Pitić: “We consulted via business round tables, correspondence, Q&As, we established strong links with the business community – banks, insurance companies, associations of entrepreneurs. And that gave us big support in the Serbian Parliament when it came time to introduce the legislation” adopted in 2003. Made-in-Serbia law What Professor Pitić’s team did not want to do was to cut-and-paste legislation from another country, as is so often suggested by foreign legal and economic consultants supplied to ministers by donors. In particular there were conflicts between the ‘civil law’ tradition of Serbia and other continental European countries, and the ‘common law’ approach of North America and the UK. “A law cannot be implemented if it has no reference or resonance in terms of our legal system,” says Ms. Perović. “The EBRD’s team studied our existing legislation and suggested ways of adapting and improving it while still respecting our legal traditions.” EBRD’s efforts were funded by the UK and by the Balkans Region Multi-Donors Special Fund (Canada, Denmark and Taipei China). Professor Orlić’s guiding hand helped hugely. “I’ve taught 30,000 students in my career and many of them were sitting in the legislature as ministers when we introduced our draft laws. It was sometimes essential for their old law professor to impress upon them the need for certain things. At times it was humiliating. But I did it so our law would be something to be proud of.” The reform effort was temporarily gutted by the assassination in 2003 of its leader, Prime Minister Zoran Djindjić, whose legislative efforts had reflected his goal of rejoining Serbia’s economy to that of western Europe. Goran Pitić, Jelena Perović and their team left government; the implementation of the secured transactions law was put on ice. In particular, it had to be backed up by a new pledge register where lenders could file the pledges made to them and verify that the collateral had not been pledged to someone else as well. The registry for ‘moveable’ property – for example a tractor pledged for a farm loan – became operational in mid-2005. This solves only half of the problem, as securing pledges over immoveable assets (eg offices, flats, fields) is still far from adequate in Serbia. But banker Radikić says the moveable property registry has already made a big difference in ProCredit Bank’s ability to lend to small businesses, the engines of economic development and job creation. “Before, we had to go before a judge so the borrower could pledge the collateral; this whole process took two weeks. The new registry is online and we can see all the information we need about a pledged asset on our computers, instantly, and file our own documentation easily. It’s all very quick. We can lend with confidence the same day that the pledge is registered online.” Kate Dunn is the EBRD’s Senior Writer.
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3 February 2006 |
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