Mutual Guarantee Institutions and Small Business Finance

30 Pages Posted: 12 May 2010

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: November 13, 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 (MGI). Our empirical analysis shows that small firms affiliated to MGIs pay less for credit compared with similar firms. 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 at screening and monitoring opaque borrowers than banks are. Thus, banks benefit from the willingness of MGIs to post collateral since this implies that firms are better screened and monitored.

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

JEL Classification: D82, G21, G30, O16

Suggested Citation

Columba, Francesco and Gambacorta, Leonardo and Mistrulli, Paolo Emilio, Mutual Guarantee Institutions and Small Business Finance (November 13, 2009). Bank of Italy Temi di Discussione (Working Paper) No. 735, Available at SSRN: https://ssrn.com/abstract=1601928 or http://dx.doi.org/10.2139/ssrn.1601928

Francesco Columba

Bank of Italy ( email )

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

Leonardo Gambacorta

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 (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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