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Firms as monitor of other firms: mutual guarantee institutions and SME finance

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  • Columba, Francesco
  • Leonardo, Gambacorta
  • Paolo Emilio, Mistrulli

Abstract

A large body of literature has shown that small firms, due to their opaqueness, may find it difficult to access the credit market. Informational asymmetries may be mitigated by posting collateral or by building relationships with lenders (relationship lending). However, in some cases, due to a lack of collateral or of a long credit history, small enterprises may still find it very difficult to raise external finance unless alternative contracting schemes emerge. In particular, group lending or similarly micro-finance are examples of such alternative lending contracts. In this paper, we investigate the effect of mutual guarantee institutions (MGI) on loan interest rates. We argue that, similarly to group lending and micro-finance, firms affiliated to a MGI are linked by a joint responsibility for the loan providing MGI affiliates with peer monitoring incentives. Indeed, each MGI member contributes to the guarantee fund that is then posted as collateral to loans granted to MGI members. As a consequence, MGI willingness to post collateral signals firms creditworthiness to banks. The econometric analysis supports the hypothesis that these consortia improve lending conditions for small firms.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14032.

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Date of creation: 12 Mar 2008
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Handle: RePEc:pra:mprapa:14032

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Related research

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

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References

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  1. Coco, G., 1998. "On the Use of Collateral," Discussion Papers 9805, Exeter University, Department of Economics.
  2. Pozzolo, Alberto Franco, 2004. "The Role of Guarantees in Bank Lending," Economics & Statistics Discussion Papers esdp04021, University of Molise, Dept. EGSeI.
  3. Erik Berglof & Ernst-Ludwig von Thadden, 1994. "Capital Structure with Multiple Investors," CEPR Financial Markets Paper 0044, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  4. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
  5. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
  6. Laffont, Jean-Jacques, 2003. "Collusion and group lending with adverse selection," Journal of Development Economics, Elsevier, vol. 70(2), pages 329-348, April.
  7. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  8. Chakraborty, Atreya & Hu, Charles X., 2006. "Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 86-107, January.
  9. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  10. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  11. Laffont, Jean-Jacques & N'Guessan, Tchetche, 2000. "Group lending with adverse selection," European Economic Review, Elsevier, vol. 44(4-6), pages 773-784, May.
  12. Luca Casolaro & Leonardo Gambacorta & Luigi Guiso, 2005. "Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy," Temi di discussione (Economic working papers) 560, Bank of Italy, Economic Research and International Relations Area.
  13. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
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Cited by:
  1. Beck, Thorsten & Klapper, Leora F. & Mendoza, Juan Carlos, 2010. "The typology of partial credit guarantee funds around the world," Journal of Financial Stability, Elsevier, vol. 6(1), pages 10-25, April.
  2. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  3. Busetta, Giovanni & Zazzaro, Alberto, 2012. "Mutual loan-guarantee societies in monopolistic credit markets with adverse selection," Journal of Financial Stability, Elsevier, vol. 8(1), pages 15-24.
  4. Ricardo Bebczuk, 2010. "Acceso al financiamiento de las PYMES en Argentina: Estado de situación y propuestas de política," CEDLAS, Working Papers 0104, CEDLAS, Universidad Nacional de La Plata.

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