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

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: 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