Collateral-based in SME lending: The role of business collateral and personal collateral in less-developed countries

Using a database of banking credit approvals for small and medium-sized enterprises (SMEs) operating in less-developed countries throughout Eastern Europe and Central Asia, this paper extends empirical evidence on the determinants of the incidence and the levels of business and personal collateral, reporting first-hand results regarding the impact of the recently reformed credit environment on collateral requirements. The findings endorse the importance of producing and sharing private information between lenders to reduce informational asymmetries and, consequently, the need to provide collateral to receive a loan. The results also suggest that market concentration increases “lazy” behavior on behalf of banks in the form of asking for collateral not to mitigate observable risk but rather to reduce screening efforts.