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

Irani Arraiz, Miriam Bruhn, Benjamin N. Roth, Claudia Ruiz Ortega and Rodolfo Stucchi

No 9072, Policy Research Working Paper Series from The World Bank

Abstract: This paper provides evidence that commercial lenders in Peru free ride off their peers'screening efforts. Leveraging a discontinuity in the loan approval process of a large bank, the study finds that 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, greatly diminishing the profits accruing to the initiating bank. Lenders may therefore underinvest in screening new borrowers and expanding financial inclusion, as their competitors reap some of the benefit. The results highlight that information spillovers between lenders may operate outside credit registries.

Date: 2019-12-03
New Economics Papers: this item is included in nep-ban, nep-fle, nep-mfd, nep-pay and nep-ure
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