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Relationship Lending in Microcredit: Evidence from Bangladesh

Author

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  • Sugato Chakravarty

    (Purdue University)

  • Abu Zafar Shahriar

    (Purdue University, West Lafayette, Indiana)

Abstract

We use primary data compiled from the field in 34 randomly selected villages in Bangladesh to examine the role of bank-borrower relationships in the application and approval stages of microcredit. We find evidence that potential borrowers who have maintained membership for a long time, and who have non-mandatory saving accounts and a successful track record of previous loans are more likely to apply, and be approved, for individual as well as group loans. Having a relationship with multiple lenders increases the probability of applying for a loan but reduces the probability of being approved for it. We also provide evidence that it is the large (rather than small) microfinance institutions who rely more on relationship metrics.

Suggested Citation

  • Sugato Chakravarty & Abu Zafar Shahriar, 2010. "Relationship Lending in Microcredit: Evidence from Bangladesh," Working Papers 1005, Purdue University, Department of Consumer Sciences.
    • Handle: RePEc:csr:wpaper:1005
    as

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    File URL: ftp://128.210.123.107/csr/wpaper/Microcredit_Apr_10.pdf
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    References listed on IDEAS

    as
    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
    3. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    4. Demirguc-Kunt, Asli & Love, Inessa & Maksimovic, Vojislav, 2006. "Business environment and the incorporation decision," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2967-2993, November.
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    Cited by:

    1. Khushbu Mishra & Richard A. Gallenstein & Mario J. Miranda & Abdoul G. Sam & Patricia Toledo & Francis Mulangu, 2021. "Insured Loans and Credit Access: Evidence from a Randomized Field Experiment in Northern Ghana," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 923-943, May.
    2. Edward Kiringa & Fredrick W.S. Ndede & Argan Wekesa, 2021. "Relationship lending and access to financial services by SMEs in Kenya," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(5), pages 235-244, July.
    3. Betgilu Oshora & Maria Fekete-Farkas & Zoltan Zeman, 2020. "Role Of Microfinance Institutions In Financing Micro And Small Enterprises In Ethiopia," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 9(3), pages 115-130.
    4. Mishra, K., 2018. "You are Approved! Insured Loans Improve Credit Access and Technology Adoption of Ghanaian Farmers," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277089, International Association of Agricultural Economists.

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    More about this item

    Keywords

    Microcredit; relationships; credit constraint; adverse selection; peer monitoring;
    All these keywords.

    JEL classification:

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

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