Collateral and its Substitutes in Emerging Markets' Lending

46 Pages Posted: 28 Sep 2011

See all articles by Lukas Menkhoff

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Doris Neuberger

University of Rostock - Department of Economics

Ornsiri Rungruxsirivorn

affiliation not provided to SSRN

Date Written: September 27, 2011

Abstract

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

Menkhoff, Lukas and Neuberger, Doris and Rungruxsirivorn, Ornsiri, Collateral and its Substitutes in Emerging Markets' Lending (September 27, 2011). CESifo Working Paper Series No. 3585. Available at SSRN: https://ssrn.com/abstract=1934161

Lukas Menkhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Doris Neuberger

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany
+49 381 498 4346 (Phone)
+49 381 498 4341 (Fax)

Ornsiri Rungruxsirivorn

affiliation not provided to SSRN ( email )

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