Mutual loan-guarantee societies in monopolistic credit markets with adverse selection

Abstract

a b s t r a c tIn many countries, Mutual Loan-Guarantee Societies (MGSs) are assuming ever-increasing importance for small business lending. In this paper we provide a theory to rationalize the raison d'être of MGSs. The basic intuition is that the motivation for MGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MGSs as a wealth-pooling mechanism that allows otherwise inefficiently rationed borrowers to obtain credit.

The Determinants of the Confidi Delinquency Rate

“…The intervention by confidi can, therefore, be extremely important for the banks which have agreements with them. They can gain a real benefit from the confidi's guarantee, not only because it will cover part of the potential losses, but especially because, by granting the guarantee, it is as though the confidi is implicitly indicating the creditworthiness of the beneficiary enterprise, owing to less risky firms to show this features to the lenders (Busetta & Zazzaro, 2012). …”

Analyzing the role of mutual guarantee societies on bank capital requirements for small and medium-sized enterprises

“…4 Lately, MGSs have received renewed attention as a response to the credit crunch in Europe. More recent research includes studies by Bartoli et al (2013); Beck, Klapper, and Mendoza (2010); Busetta and Zazzaro (2012); and Columba, Gambacorta, and Mistrulli (2010). Bartoli et al (2013) provide empirical evidence showing that the presence of MGSs constitutes an important element of the financial system to moderate the malfunctioning of credit markets at times of systemic crises.…”

“…The authors find that the government plays an important role in partial credit guarantee schemes around the world but is mostly limited to funding and management and participates much less in credit risk assessment and recovery. For Busetta and Zazzaro (2012), the motivation for the existence of MGSs lies in the inefficiencies created by adverse selection when borrowers do not have enough collateralizable wealth to satisfy collateral requirements and induce self-selecting contracts. Finally, Columba, Gambacorta, and Mistrulli (2010) conclude that small firms affiliated with MGSs obtain loans at interest rates that are significantly lower than those for unaffiliated small firms.…”

“…MGS members contribute to a guarantee fund, which is then used as collateral to back loans granted to the members themselves (Bartoli et al 2013). This guarantee helps small companies to obtain financing under better conditions in terms of rate, credit amount, and term offered (Busetta and Zazzaro 2012;Camino and CardoneRiportella 1999). 1 Credit guarantee schemes have been an instrument of choice for policy makers to improve SMEs and entrepreneurs' access to finance in the recent global economic crisis, while limiting the burden on public finances.…”

A Comparison between Formal and Informal Mutual‐credit Arrangements

“…Indeed, the existing theoretical literature has not devoted much attention to such associations. One of the few exceptions is Busetta and Zazzaro (), who focus on an adverse‐selection environment where prospective entrepreneurs pool their savings to raise the collateral required by a monopolistic lender to screen different types. In our paper, however, the emphasis is on the incentive mechanism needed to solve the ex‐ante moral hazard problem of each potential borrower, in the two polar assumptions of monopolistic and perfectly competitive credit markets.…”