The use of collateral in formal and informal lending

Carmen Kislat, Lukas Menkhoff and Doris Neuberger

No 1879, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: We offer a new test of the ex ante theory of collateral. Theory states that lenders rely less on collateral if they have better information about borrowers. We test this by contrasting the use of collateral between formal and - better informed - informal lenders in a developing financial market. Indeed, formal lenders rely about 40% more often on collateral than informal lenders, controlling for conventional determinants of collateral. Moreover, having better information about borrowers has implications within lender groups: formal lenders rely less on collateral with longer borrower-relationship and informal lenders rely less on collateral with shorter distance to the borrower.

Keywords: collateral; informal lenders; private information; relationship lending; distance (search for similar items in EconPapers)
JEL-codes: G21 O16 O17 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The use of collateral in formal and informal lending (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1879

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