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Informal collateral and default risk: do 'Grameen-like' banks work in high-income countries?

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  • Leonardo Becchetti
  • Maria Melody Garcia

Abstract

We study collateralization strategy and effects on the ex post loan performance of a European 'Grameen-type' bank which mainly finances small firms or microfirms and seeks to reconcile economic sustainability with social goals. Our analysis on individual loan data documents that the bank has a remarkably low share of nonperforming loans in spite of an extremely high share of uncollateralized loans (around 42%). Econometric findings document that collateralization depends positively on ex ante borrower's risk (proxied by nonperforming past track record) and negatively on relationship lending. In this regard, the originality of the bank's policy is that of lending to small borrowers which belong to larger networks and consortia with which the bank has a long history of relationships. The incentive effect seems to work because collateralized borrowers are riskier ex ante, but not ex post.

Suggested Citation

  • Leonardo Becchetti & Maria Melody Garcia, 2011. "Informal collateral and default risk: do 'Grameen-like' banks work in high-income countries?," Applied Financial Economics, Taylor & Francis Journals, vol. 21(13), pages 931-947.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:13:p:931-947
    DOI: 10.1080/09603107.2011.554368
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    References listed on IDEAS

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    1. Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 557-575.
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    Cited by:

    1. Simon Cornée & Panu Kalmi & Ariane Szafarz, 2016. "Selectivity and Transparency in Social Banking: Evidence from Europe," Journal of Economic Issues, Taylor & Francis Journals, vol. 50(2), pages 494-502, April.
    2. D’Amato Marcello & Di Pietro Christian & Pietroluongo Mariafortuna & Sorge Marco M., 2021. "Good Co(o)p or Bad Co(o)p? Redistribution Concerns and Competition in Credit Markets with Imperfect Information," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 21(2), pages 657-694, April.
    3. Barigozzi, Francesca & Tedeschi, Piero, 2019. "On the credibility of ethical banking," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 381-402.
    4. Andrikopoulos, Andreas, 2020. "Delineating social finance," International Review of Financial Analysis, Elsevier, vol. 70(C).
    5. Leonardo Becchetti & Pierluigi Conzo, 2014. "The effects of microfinance on child schooling: a retrospective approach," Applied Financial Economics, Taylor & Francis Journals, vol. 24(2), pages 89-106, January.
    6. Leonardo Becchetti, 2013. "Ethical finance: an introduction," Chapters, in: Luigino Bruni & Stefano Zamagni (ed.), Handbook on the Economics of Reciprocity and Social Enterprise, chapter 13, pages 134-143, Edward Elgar Publishing.

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