Working Paper

The Use of Collateral in Formal and Informal Lending

Authors

  • Carmen Kislat
  • Lukas Menkhoff
  • Doris Neuberger
Publication Date

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.

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Info

JEL Classification
G21, O16, O17

Key Words

  • collateral
  • distance
  • informal lenders
  • private information
  • Relationship lending