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Mutual guarantee institutions and small business finance

Francesco Columba, Leonardo Gambacorta and Paolo Emilio Mistrulli ()

No 735, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining Mutual Guarantee Institutions (MGI). Our empirical analysis shows that small firms affiliated to MGIs pay less for credit compared with similar firms. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better at screening and monitoring opaque borrowers than banks are. Thus, banks benefit from the willingness of MGIs to post collateral since this implies that firms are better screened and monitored.

Keywords: credit guarantee schemes; joint liability; microfinance; peer monitoring; small business finance (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-ban, nep-cta, nep-ent and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Journal Article: Mutual guarantee institutions and small business finance (2010) Downloads
Working Paper: Mutual guarantee institutions and small business finance (2009) Downloads
Working Paper: Mutual Guarantee Institutions and Small Business Finance (2009) Downloads
Working Paper: Mutual Guarantee Institutions and Small Business Finance (2009) Downloads
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