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Does corruption hamper bank lending? Macro and micro evidence

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  • Laurent Weill

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Abstract

The aim of this paper is to analyze the effect of corruption in bank lending. Corruption is expected to hamper bank lending, as it is closely related to legal enforcement, which has been shown to promote banks' willingness to lend. Nevertheless the similarities between the consequences for bank lending of law enforcement and corruption are misleading, as they consider only judiciary corruption. Corruption can also occur in lending and may then be beneficial for bank lending via bribes given by borrowers to enhance their chances of receiving loans. This assumption may be validated particularly in the presence of pronounced risk aversion by banks, resulting in greater reluctance on the part of banks to grant loans. We perform country-level and bank-level estimations to investigate these assumptions. Corruption reduces bank lending in both sets of estimations. However, bank-level estimations show that the detrimental effect of corruption is reduced when bank risk aversion increases, even leading at times to situations wherein corruption fosters bank lending. Additional controls show that corruption does not increase bank credit by favoring only bad loans. Therefore, our findings show that while the overall effect of corruption is to hamper bank lending, it can alleviate firm's financing obstacles. JEL Codes: G20, O5 Keywords: Corruption, bank, financial development.
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Suggested Citation

  • Laurent Weill, 2011. "Does corruption hamper bank lending? Macro and micro evidence," Empirical Economics, Springer, vol. 41(1), pages 25-42, August.
  • Handle: RePEc:spr:empeco:v:41:y:2011:i:1:p:25-42
    DOI: 10.1007/s00181-010-0393-4
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    References listed on IDEAS

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    Cited by:

    1. Awaworyi Churchill, Sefa & Korankye Danso, Jeffrey & Nyatefe, Elikem, 2015. "Microfinance Institution Performance: Does the Macro-economy matter?," EconStor Preprints 123724, ZBW - German National Library of Economics.
    2. Fungáčová, Zuzana & Kochanova, Anna & Weill, Laurent, 2015. "Does Money Buy Credit? Firm-Level Evidence on Bribery and Bank Debt," World Development, Elsevier, vol. 68(C), pages 308-322.
    3. Olaf J. de Groot & Anja Shortland, 2010. "Gov-arrrgh-nance: Jolly Rogers and Dodgy Rulers," Economics of Security Working Paper Series 39, DIW Berlin, German Institute for Economic Research.
    4. Erotokritos Varelas, 2017. "Is bank lending corruption self-regulatory? A note," Discussion Paper Series 2017_03, Department of Economics, University of Macedonia, revised Mar 2017.

    More about this item

    Keywords

    Corruption; Bank; Financial development; G20; O5;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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