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Mutual guarantee institutions and small business finance

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  • Francesco Columba
  • Leonardo Gambacorta
  • Paolo Emilio Mistrulli

Abstract

A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs). Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored.

Suggested Citation

  • Francesco Columba & Leonardo Gambacorta & Paolo Emilio Mistrulli, 2009. "Mutual guarantee institutions and small business finance," BIS Working Papers 290, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:290
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    References listed on IDEAS

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    4. Coco, Giuseppe, 2000. " On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
    5. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    6. Columba, Francesco & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2009. "The effects of mutual guarantee consortia on the quality of bank lending," MPRA Paper 17052, University Library of Munich, Germany, revised Mar 2009.
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    More about this item

    Keywords

    credit guarantee schemes; joint liability; microfinance; peer monitoring; small business finance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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