Getting Credit: How Banks Make Lending Decisions in Argentina, Peru, and the World, With an Emphasis on Secured Transactions and Trust

Posted: 8 Feb 2007 Last revised: 24 Oct 2019

Date Written: January 1, 2006


This paper examines how legal, institutional, and social frameworks impact bank financing of firms. It builds on theory about law and finance and about finance and growth, drawing on financial economics, law, and political science. The paper uses qualitative data from field studies in Peru and Argentina to assess how banks finance firms. It finds that banks in these two countries do not finance innovation, that they prefer large firms in order to capture transactional business, and that maturities are short. In fact, the banks take on investor-like behavior. They ration credit rather than adjust the price. Several assertions in financial theory do not provide a good description of the financing environment in Peru and Argentina. For example, banks do not allocate resources from savings efficiently; they do not allow higher risk levels than individual investors; they do not focus on future firm performance; they monitor closely rather than rely on standardized contracts; and they use collateral to remedy agency problems, not to reduce risk. Searching for an explanation, the paper reviews the literature on secured transactions to see if shortcomings in the legal framework can explain observed lending patterns. It reviews experiences from Eastern Europe, where secured transactions reform is particularly advanced. Comparing this with Peru and Argentina, the paper concludes that it is unlikely that legal shortcomings provide an explanation. When employing global cross-country data, creditor-related law appears much less important than political stability, modern values, and social capital (trust). The observations from Peru and Argentina, cross-country regressions, and theory indicate that interpersonal trust and trust in institutions matter, in addition to the performance of institutions. The findings suggest that reforming the framework for bank financing must be accompanied by measures designed to build trust in institutions. Throughout the paper, the findings from Peru and Argentina are compared to global cross-country data. In most cases, the observations in Peru and Argentina fit with global patterns. This suggests that the findings of the paper can be used also when analyzing other countries, although the paper emphasizes the need for a thorough understanding of any individual country before formulating policy.

Keywords: financial economics, secured transactions, social capital, trust, legal reform, finance and politics

JEL Classification: G21, G33, G32, K10, K20,O16, O57, D21, D23

Suggested Citation

Andreassen, Ole E., Getting Credit: How Banks Make Lending Decisions in Argentina, Peru, and the World, With an Emphasis on Secured Transactions and Trust (January 1, 2006). Available at SSRN: or

Ole E. Andreassen (Contact Author)

University of Tromsø ( email )

UiT Norges arktiske universitet
Postboks 6050 Langnes
Tromsø, 9037

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