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The Effect of Relationship Lending on Loan Contract Terms

Author

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  • Foroughfard, Rasoul

    (Sharif University of Technology)

  • Rahmati, Mohammad

    (Sharif University of Technology)

Abstract

This paper investigates the effect of relationship-lending on loan contract terms, especially on the interest rate, loan value, and collateral requirements. For this purpose, data on 4850 loans granted by a bank in 2016 is employed. Our estimations show a negative and significant relationship between the interest rate and quality and quantity of borrower-lender relationship. Furthermore, there has been a positive and significant relationship between loan volumes granted to the borrower and the scope of his/her relation with the bank. Finally, there has been a positive and insignificant relationship between customer relationship with the bank and pledged collateral. The relationship-lending, as a solution for asymmetry information problems, is a winner-winner game such that the lender saves on screening expenses and the borrower is financed at lower costs. Thus, deliberate regulation in support of relationship lending increases the welfare of both sides of the credit market.

Suggested Citation

  • Foroughfard, Rasoul & Rahmati, Mohammad, 2019. "The Effect of Relationship Lending on Loan Contract Terms," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(2), pages 133-157, April.
    • Handle: RePEc:mbr:jmonec:v:14:y:2019:i:2:p:133-157
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    More about this item

    Keywords

    Bank; Borrower; Lender; Asymmetry Information; Relationship-Lending;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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