Mutual Guarantee Institutions and Small Business Finance
CentER Discussion Paper Series No. 2009-32S
35 Pages Posted: 21 May 2009
Date Written: May 18, 2009
A large literature showed that small firms experience difficulties in accessing the credit market due to informational asymmetries; these may be mitigated by collateral or relationship lending, possibilities often precluded to small business. We investigate the effect on small business finance of an alternative contractual scheme based on group lending, the Mutual Guarantee Institution (MGI). We test whether firms affiliated to MGIs pay less for credit, due to a joint responsibility that provides affiliates with peer monitoring incentives. Hence, MGI willingness to post collateral signals firms credit-worthiness to banks. Our estimates indicate that indeed MGI affiliation improves small firms lending.
Keywords: credit guarantee schemes, group lending, joint liability, microfinance, peer monitoring, small business finance
JEL Classification: D82, G21, G30, O16
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