Local Public Corruption and Bank Lending Activity in the United States

Abstract

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The effect of corruption on microfinance loan portfolio: A semiparametric analysis

“…In a transaction‐based approach, lenders (financial institutions) demand hard information such as financial statements, quality, and documentation of collateral as input for measuring credibility and affordability. This approach is consistent with standard banking practices and fulfilment of financial institution requirements (Bermpei et al., 2020). The relationship‐based approach of lending involves the collection and use of non‐documented financial and non‐financial information (Bermpei et al., 2020).…”

“…This approach is consistent with standard banking practices and fulfilment of financial institution requirements (Bermpei et al., 2020). The relationship‐based approach of lending involves the collection and use of non‐documented financial and non‐financial information (Bermpei et al., 2020). In the absence of hard information, which is the case of many MFIs, the lender relies primarily on soft‐proprietary information on the borrowers, which are not easily quantifiable (Berger & Black, 2011).…”

“…The business of lending relies on transaction‐based (hard information), and relationship‐based (soft information) approaches (Bermpei et al., 2020). In a transaction‐based approach, lenders (financial institutions) demand hard information such as financial statements, quality, and documentation of collateral as input for measuring credibility and affordability.…”

“…Bermpei et al. (2020) argue that the relationship approach generates significant information for credit provisions. This soft information is acquired through numerous contacts and the local community.…”

“…Hence, they need to operate within boundaries and regulations and, therefore, are less likely to tolerate any form of corrupt practices. However, from the demand side, the customer base of MFIs are largely the informal sector, and people with low income who cannot fulfil all the numerous banking requirements (Becchetti & Castriota, 2011; Rai & Ravi, 2011); hence their business with MFI is more likely to be based on relationships than hard information such as financial statements and credit scores (Bermpei et al., 2020). Furthermore, besides being in developing countries, MFIs are domiciled in rural towns where access to information and resources may require some form of “gifting” (Godquin, 2004).…”