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Collateral and its Substitutes in Emerging Markets' Lending

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  • Lukas Menkhoff
  • Doris Neuberger
  • Ornsiri Rungruxsirivorn

Abstract

Due to opaque information and weak enforcement in emerging loan markets, the need for collateral is high, whereas borrowers lack adequate assets to pledge as collateral. How is this puzzle solved? We find for a representative sample from Northeast Thailand that indeed most loans do not include any tangible assets as collateral. Instead, lenders enforce collateral-free loans through third-party guarantees and relationship lending, but also through modifying loan terms, such as reducing loan size. Guarantees are the relatively most important substitute, they reduce collateral requirements independently of relationship lending and they are more often used by formal financial institutions.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3585.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3585

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Keywords: lending; financial institutions; collateral; guarantees; relationship lending;

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References

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Cited by:
  1. Chen, Jeff Zeyun & Lobo, Gerald J. & Wang, Yanyan & Yu, Lisheng, 2013. "Loan collateral and financial reporting conservatism: Chinese evidence," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4989-5006.
  2. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 106-121.
  3. Berger, A.N. & Frame, W.S. & Ioannidou, V., 2012. "Reexamining the Empirical Relation between Loan Risk and Collateral: The Role of the Economic Characteristics of Collateral," Discussion Paper 2012-078, Tilburg University, Center for Economic Research.
  4. Toni Beutler & Mathieu Grobéty, 2011. "The Collateral Channel under Imperfect Debt Enforcement," Working Papers 11.11, Swiss National Bank, Study Center Gerzensee.
  5. Carmen Kislat & Lukas Menkhoff & Doris Neuberger, 2013. "The Use of Collateral in Formal and Informal Lending," Kiel Working Papers 1879, Kiel Institute for the World Economy.
  6. Elmas Yaldiz Hanedar & Eleonora Broccardo & Flavio Bazzana, 2012. "Collateral Requirements of SMEs:The Evidence from Less–Developed Countries," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12111, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  7. Neuberger, Doris & Räthke-Döppner, Solvig, 2014. "The role of demographics in small business loan pricing," Thuenen-Series of Applied Economic Theory 134, University of Rostock, Institute of Economics.

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