Mutual Guarantee Institutions and Small Business Finance
International Monetary Fund (IMF); Bank of Italy
Bank for International Settlements (BIS); Bank of Italy
Paolo Emilio Mistrulli
Bank of Italy
October 1, 2009
BIS Working Paper No. 290
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.
Number of Pages in PDF File: 22
Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance
JEL Classification: D82, G21, G3, O16working papers series
Date posted: October 22, 2009
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.891 seconds