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Collateral and its Substitutes in Emerging Markets' Lending
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Collateral and its Substitutes in Emerging Markets' Lending

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  • Lukas Menkhoff
  • Doris Neuberger
  • Ornsiri Rungruxsirivorn

Abstract

Due to opaque information and weak enforcement in emerging loan markets, the need for collateral is high, whereas borrowers lack adequate assets to pledge as collateral. How is this puzzle solved? We find for a representative sample from Northeast Thailand that indeed most loans do not include any tangible assets as collateral. Instead, lenders enforce collateral-free loans through third-party guarantees and relationship lending, but also through modifying loan terms, such as reducing loan size. Guarantees are the relatively most important substitute, they reduce collateral requirements independently of relationship lending and they are more often used by formal financial institutions.

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  • Lukas Menkhoff & Doris Neuberger & Ornsiri Rungruxsirivorn, 2011. "Collateral and its Substitutes in Emerging Markets' Lending," CESifo Working Paper Series 3585, CESifo.
    • Handle: RePEc:ces:ceswps:_3585
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    More about this item

    Keywords

    lending; financial institutions; collateral; guarantees; relationship lending;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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