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Mutual guarantee institutions and small business finance

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  • Francesco Columba
  • Leonardo Gambacorta
  • Paolo Emilio Mistrulli

Abstract

A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs). Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 290.

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Length: 22 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:bis:biswps:290

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Keywords: credit guarantee schemes; joint liability; microfinance; peer monitoring; small business finance;

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References

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Citations

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Cited by:
  1. Francesca Bartoli & Giovanni Ferri & Pierluigi Murro & Zeno Rotondi, 2011. "Bank-firm relations and the role of Mutual Guarantee Institutions during the crisis," series, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari 0034, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Jan 2011.
  2. ONO Arito & UESUGI Iichiro & YASUDA Yukihiro, 2011. "Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 11035, Research Institute of Economy, Trade and Industry (RIETI).
  3. Columba, Francesco & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2009. "The effects of mutual guarantee consortia on the quality of bank lending," MPRA Paper 17052, University Library of Munich, Germany, revised Mar 2009.
  4. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
  5. Giovanni Busetta & Alberto Zazzaro, 2009. "Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 33, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Ansgar Belke, 2013. "Finance Access of SMEs: What Role for the ECB?," ROME Working Papers, ROME Network 201310, ROME Network.
  7. Gallurt Povedano, Jesús & Ramírez Sobrino, Jesús N. & Pombo González, Pablo & Molina Sánchez, Horacio, 2013. "¿Los Sistemas de Garantía se orientan al prestatario o a las entidades de crédito? Estudio de la experiencia en Latinoamérica/Are Guarantee Systems oriented towards borrowers or credit institution," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 31, pages 251 (20pags, Enero.
  8. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, Elsevier, vol. 10(C), pages 76-86.
  9. Anaïs A Périlleux, 2010. "Maturity Mismatch and Governance of Microfinance Cooperatives: Lessons from History," Working Papers CEB, ULB -- Universite Libre de Bruxelles 10-005.RS, ULB -- Universite Libre de Bruxelles.
  10. Paolo Emilio Mistrulli & Valerio Vacca & Gennaro Corbisiero & Silvia del Prete & Luciano Esposito & Marco Gallo & Mariano Graziano & Maurizio Lozzi & Vincenzo Maffione & Daniele Marangoni & Andrea Mig, 2011. "Mutual Guarantee Institutions (MGIs) and small business credit during the crisis," Questioni di Economia e Finanza (Occasional Papers) 105, Bank of Italy, Economic Research and International Relations Area.
  11. Yoram Kroll & Assaf Cohen, 2013. "Optimum pricing of mutual guarantees for credit," Small Business Economics, Springer, Springer, vol. 41(1), pages 253-262, June.
  12. Francesca Bartoli & Giovanni Ferri & Pierluigi Murro & Zeno Rotondi, 2012. "SME Financing and the Choice of Lending Technology in Italy: Complementarity or Substitutability?," Working Papers CASMEF, Dipartimento di Economia e Finanza, LUISS Guido Carli 1212, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  13. Alessio D'Ignazio & Carlo Menon, 2013. "The causal effect of credit guarantees for SMEs: evidence from Italy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 900, Bank of Italy, Economic Research and International Relations Area.
  14. Karel Janda, 2011. "Credit Rationing and Public Support of Commercial Credit," CERGE-EI Working Papers wp436, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  15. Clara Cardone-Riportella & Antonio Trujillo-Ponce & Anahí Briozzo, 2013. "Analyzing the role of mutual guarantee societies on bank capital requirements for small and medium-sized enterprises," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(2), pages 142-159, June.

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