Collateral and its Substitutes in Emerging Markets' Lending
46 Pages Posted: 28 Sep 2011
Date Written: September 27, 2011
Due to opaque information and weak enforcement in emerging loan markets, the need for collateral is high, whereas borrowers lack adequate assets to pledge as collateral. How is this puzzle solved? We find for a representative sample from Northeast Thailand that indeed most loans do not include any tangible assets as collateral. Instead, lenders enforce collateral-free loans through third-party guarantees and relationship lending, but also through modifying loan terms, such as reducing loan size. Guarantees are the relatively most important substitute, they reduce collateral requirements independently of relationship lending and they are more often used by formal financial institutions.
Keywords: lending, financial institutions, collateral, guarantees, relationship lending
JEL Classification: G210, O160
Suggested Citation: Suggested Citation