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Problems of Bank Lending in Bulgaria: Information Asymmetry and Institutional Learning


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  • Kenneth Koford
  • Adrian E. Tschoegl


Why are there such severe problems in lending in the transition countries? This research took a microeconomic and institutional look at part of the problem. We conducted interviews in Bulgaria and Hungary and sought answers to two questions. First, how do banks making "normal" loans insure that they were making "good" loans? Second, how do banks get their money back on loans that have turned bad? Clearly, weaknesses at either stage could explain both past loan failures and present reluctance to lend. The bankers we spoke to reported significant difficulties at both stages of the credit process. First, the bankers reported difficulties in accumulating the information to evaluate borrowers and their projects. The bankers also reported problems with encouraging borrowers to repay and difficulties with seizing collateral, and using legal action in collecting bad debts. Although many of the problems are universal problems of bank lending, many seemed specific to transition economies in general and Bulgaria in particular. We identified specific problems with obtaining and using the evidence about borrowers that might have been available. Bulgarian bankers were often less than fully effective in collecting all available information, or in considering later how they could improve their methods of evaluating clients. One method that more banks might usefully adopt is systematic review of loan losses and the incorporation of lessons learned into the training of new loan officers. In addition, there were serious difficulties in sharing information about borrowers among bankers and between bankers and other firms. Some relaxation of bank secrecy would be appropriate. We also identified policy areas where improvement appears appropriate. Reputation can be effective in ensuring that borrowers fulfill their contracts. However, there is a general lack of credit reporting institutions to share information about credit-worthiness; this need to be remedied. The heavy reliance on collateral imposes high costs on borrowers and lenders. For collateral to work properly, banks must be able to perfect the collateral and to dispose of it quickly. Finally, fraud against banks was common, but typically went unpunished; prosecutors were apparently not interested in such cases. Bankers and prosecutors must make the prosecution of bank fraud a priority. We base our findings on the 24 banking interviews we conducted in Bulgaria. We also conducted 12 interviews in Hungary. Bankers were surprisingly candid in describing most of their problems.

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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-41.

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Date of creation: Sep 1997
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Handle: RePEc:wop:pennin:97-41

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  1. William Hallagan, 1997. "Speed And Sequencing Of Market Reforms: The Case Of Banking In Latvia," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 24-34, 04.
  2. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
  3. Raghuram G. Rajan, 1996. "Why Banks Have A Future: Toward A New Theory Of Commercial Banking," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 114-128.
  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  5. Orlean, Andre, 1995. "Bayesian interactions and collective dynamics of opinion: Herd behavior and mimetic contagion," Journal of Economic Behavior & Organization, Elsevier, vol. 28(2), pages 257-274, October.
  6. Lamoreaux,Naomi R., 1994. "Insider Lending," Cambridge Books, Cambridge University Press, number 9780521460965.
  7. Callier, Philippe, 1990. "Informal Finance: The Rotating Saving and Credit Association--An Interpretation," Kyklos, Wiley Blackwell, vol. 43(2), pages 273-76.
  8. Telser, L G, 1980. "A Theory of Self-enforcing Agreements," The Journal of Business, University of Chicago Press, vol. 53(1), pages 27-44, January.
  9. Naomi R. Lamoreaux, 1991. "Information Problems and Banks' Specialization in Short-Term Commercial Lending: New England in the Nineteenth Century," NBER Chapters, in: Inside the Business Enterprise: Historical Perspectives on the Use of Information, pages 161-204 National Bureau of Economic Research, Inc.
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Cited by:
  1. Sõrg, Mart, 2003. "Reformation of the Estonian banking system," Wirtschaftswissenschaftliche Diskussionspapiere 02/2003, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  2. Berlemann, Michael & Nenovsky, Nikolay, 2003. "Lending of first versus lending of last resort: The Bulgarian financial crisis of 1996/1997," Dresden Discussion Paper Series in Economics 11/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  3. Chen, Anlin & Kao, Lanfeng, 2011. "Effect of collateral characteristics on bank performance: Evidence from collateralized stocks in Taiwan," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 300-309, February.
  4. Sõrg, Mart & Tuusis, Danel, 2008. "Foreign banks increase the social orientation of Estonian financial sector," Wirtschaftswissenschaftliche Diskussionspapiere 01/2008, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  5. Christa Hainz, 2004. "Are Transition Countries Overbanked? The Effect of Institutions on Bank Market Entry," German Economic Review, Verein für Socialpolitik, vol. 5(2), pages 237-256, 05.
  6. Größl, Ingrid, 2005. "The interplay of legal and social norms and the failure of the bank credit market in Bulgaria," Discussion Papers 04, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).
  7. Koford, Kenneth & Miller, Jeffrey B., 2006. "Contract enforcement in the early transition of an unstable economy," Economic Systems, Elsevier, vol. 30(1), pages 1-23, March.
  8. Albert Park & Minggao Shen, 2002. "A Refinancing Model of Decentralization with Empirical Evidence from China," William Davidson Institute Working Papers Series 461, William Davidson Institute at the University of Michigan.
  9. Nikolay Nenovsky & Kalina Dimitrova, 2003. "Deposit Insurance During EU Accession," William Davidson Institute Working Papers Series 2003-617, William Davidson Institute at the University of Michigan.
  10. Koford, Kenneth, 2000. "Citizen restraints on "Leviathan" government: transition politics in Bulgaria," European Journal of Political Economy, Elsevier, vol. 16(2), pages 307-338, June.
  11. Hainz, Christa, 2003. "Bank competition and credit markets in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 223-245, June.
  12. Adrian E. Tschoegl, . "The Key to Risk Management: Management," Center for Financial Institutions Working Papers 99-42, Wharton School Center for Financial Institutions, University of Pennsylvania.


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