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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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    Cited by:

    1. Simon Cornée & Panu Kalmi & Ariane Szafarz, 2015. "Selectivity and Transparency in Social Banking: Evidence from Europe," Working Papers CEB 15-047, ULB -- Universite Libre de Bruxelles.
    2. Leonardo Becchetti, 2013. "Ethical finance: an introduction," Chapters,in: Handbook on the Economics of Reciprocity and Social Enterprise, chapter 13, pages 134-143 Edward Elgar Publishing.

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