Access to Credit and Land Rights
Land law constitutes an important factor for sustainable development and private sector growth. It creates property rights systems for individuals, businesses, and the state, which, in turn, will create incentives to conserve and produce. It sets out the circumstances in which, and processes by which, rights in land can be transferred, permanently or temporarily, or used to secure loans. It also embodies some limitations imposed by the state on those rights, for instance, zoning rules that limit land use or rules prohibiting transfers of land to foreigners. The legal structures reflect basic allocative decisions of the society and influence the extent of poverty and prosperity in an economy.
Land law provides a critical portion of the legal infrastructure for private sector investment and a modern financial system. Secure land rights allow investors with a safe time horizon to invest and to recoup investments and, thus, are an important element in the incentive structure for investment. Also, marketable land rights allow land to move to those who will use it more efficiently and who are thus willing to pay more for it, increasing its productive use. In addition, mortgageable land rights can be used to raise capital for investments, and those rights can play a key role in capital formation in developing economies.
In many countries, landholders do not enjoy secure and transferable tenure. Often, vast bureaucracies administer systems of tenure, such as long-term leaseholds from the state in which official permission is needed for transactions, and the transactions are subject to onerous taxation. Use controls built into titles may freeze land in what have become inappropriate uses. Mortgaging or real estate development may be flatly proscribed. In such situations, local land administration officials often take full advantage of the rent-seeking opportunities posed by their discretionary power.
Businesses commonly complain of the shortfalls and frustrations of land laws and land administration and of the cost they pose for doing business. The frustrations occur because, even where land law is adequately framed to promote private sector development, reliable proof of titles may be difficult. Land survey services and services to determine and register titles are essential to making land rights effective, and they are often almost as important as the content of the right itself.
On the financial side, mortgageability is the critical characteristic of land. It is vital to allow individuals to be able to raise capital for the capitalization of the economy. Land is the primary form of collateral for credit. Land registration also can provide a link to the owner’s credit history, an accountable address for the collection of debts and taxes, a basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities (such as mortgage-backed bonds) that can then be rediscounted and sold in secondary markets.
Secured transaction law can yield significant financial and fiscal benefits. Advanced secured transaction laws provide more credit by reducing the costs of borrowing and thus can increase the amount of available credit in the economy. Any reduction in the costs of borrowing enhances the advantage, thus ensuring that debt offers an advantage to firms. And for public finance, the existence of an adequate system of records of rights in land can provide the basis for land taxation, a relatively simple and easy-to-administer tax
that has been critical in many countries to the funding of decentralized local government programs. The land law ought to establish (a) basic property rights, (b) transferability and basic mortgage ability, (c) adequate systems for recording those rights and their transfer, and (d) framework for securities that are based on the value of assets in land.