Free Riding in Loan Approvals: Evidence from SME Lending in Peru

46 Pages Posted: 12 Feb 2020

See all articles by Irani Arraiz

Irani Arraiz

InterAmerican Development Bank

Miriam Bruhn

World Bank - Development Research Group (DECRG)

Benjamin Roth

Harvard University - Business School (HBS)

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG)

Rodolfo Stucchi

InterAmerican Development Bank

Multiple version iconThere are 2 versions of this paper

Date Written: December 26, 2019

Abstract

We provide evidence that commercial lenders in Peru free ride off their peer’s screening efforts. Leveraging a discontinuity in the loan approval process of a large bank, we find competing lenders responded to additional loan approvals by issuing approvals of their own. Competing lenders captured almost three quarters of the new loans to previously financially excluded borrowers. Importantly, many of these borrowers never took a loan from our partner bank, even after our partner bank approved them. Lenders may therefore underinvest in screening new borrowers and expanding financial inclusion, as their competitors reap some of the benefit. Our results highlight that information spillovers between lenders may operate outside of credit registries.

Keywords: Information Spillovers, Banking, SME Lending, Financial Inclusion

JEL Classification: G21

Suggested Citation

Arraiz, Irani and Bruhn, Miriam and Roth, Benjamin and Ruiz Ortega, Claudia and Stucchi, Rodolfo, Free Riding in Loan Approvals: Evidence from SME Lending in Peru (December 26, 2019). Harvard Business School Entrepreneurial Management Working Paper No. 20-079. Available at SSRN: https://ssrn.com/abstract=3535740 or http://dx.doi.org/10.2139/ssrn.3535740

Irani Arraiz

InterAmerican Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20008
United States

Miriam Bruhn

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Benjamin Roth (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, NW
Washington, DC 20433
United States

Rodolfo Stucchi

InterAmerican Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20577
United States
+1 (202) 5237619 (Phone)

HOME PAGE: http://https://www.sites.google.com/site/rodolfostucchi/

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