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Does IDA engage in defensive lending ?

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  • Geginat, Carolin
  • Kraay, Aart

Abstract

Multilateral development banks are frequently accused of"defensive lending,"the practice of extending new loans purely in order to ensure that existing loans are repaid. This paper empirically examine this hypothesis using data on lending by and repayments to the International Development Association (IDA), which is the largest provider of concessional development loans to low-income countries. The authors argue that key institutional features of IDA both (i) potentially create incentives for defensive lending, and (ii) enable particularly sharp tests of the defensive lending hypothesis. The authors find that there is a surprisingly robust partial correlation between disbursements on new IDA loans and repayments on existing loans. However, a closer look at the evidence suggests that defensive lending is unlikely to be a major explanation for this partial correlation.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4328.

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Date of creation: 01 Aug 2007
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Handle: RePEc:wbk:wbrwps:4328

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Keywords: Debt Markets; Bankruptcy and Resolution of Financial Distress; Access to Finance; Banks&Banking Reform; Economic Theory&Research;

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Cited by:
  1. Bjørnskov, Christian & Schröder, Philipp J.H., 2013. "Are debt repayment incentives undermined by foreign aid?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1073-1091.
  2. Claudio Raddatz, 2011. "Multilateral Debt Relief through the Eyes of Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1262-1288, November.
  3. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics, University of Bergen, Department of Economics 01/14, University of Bergen, Department of Economics.
  4. Silvia Marchesi & Alessandro Missale, 2012. "Did high debts distort loans and grants allocation to IDA countries?," Working Papers, University of Milano-Bicocca, Department of Economics 226, University of Milano-Bicocca, Department of Economics, revised Aug 2012.

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