Mutual Guarantee Institutions and Small Business Finance

22 Pages Posted: 21 Oct 2009

See all articles by Francesco Columba

Francesco Columba

Bank of Italy

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Paolo Emilio Mistrulli

Bank of Italy

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2009

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.

Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance

JEL Classification: D82, G21, G3, O16

Suggested Citation

Columba, Francesco and Gambacorta, Leonardo and Mistrulli, Paolo Emilio, Mutual Guarantee Institutions and Small Business Finance (October 1, 2009). BIS Working Paper No. 290, Available at SSRN: https://ssrn.com/abstract=1491555 or http://dx.doi.org/10.2139/ssrn.1491555

Francesco Columba

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39-06-47922131 (Phone)
+39-09-47923611 (Fax)

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paolo Emilio Mistrulli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
99
Abstract Views
783
rank
90,835
PlumX Metrics