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Unlocking Credit

In: Risk Management Post Financial Crisis: A Period of Monetary Easing

Author

Listed:
  • Ike Mathur
  • Isaac Marcelin

Abstract

Pledging collateral to secure loans is a prominent feature in financing contracts around the world. Existing theories disagree on why borrowers pledge collateral. It is even more challenging to understand why in some countries collateral coverage exceeds, for example, 300% of the value of a loan. This study looks at the association between collateral coverage and country-level governance and various institutional proxies. It investigates the economic implications of steep collateral coverage and sketches policy options to lower ex-ante asymmetric information and ex-post agency problems. Within this framework, should a lender collect the debt forcibly on default and liquidated assets fetch prices below outstanding loan values, the lender’s loss is covered through credit insurance, which would significantly reduce the need for steep collateral coverage. This proposal may increase level of private credit, investment and growth; particularly, in a number of developing countries where collateral spread is the main inhibitor of finance.

Suggested Citation

  • Ike Mathur & Isaac Marcelin, 2014. "Unlocking Credit," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 221-252, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-375920140000096009
    DOI: 10.1108/S1569-375920140000096009
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    Citations

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    Cited by:

    1. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.
    2. Marcelin, Isaac & Egbendewe, Aklesso Y.G. & Oloufade, Djoulassi K. & Sun, Wei, 2022. "Financial inclusion, bank ownership, and economy performance: Evidence from developing countries," Finance Research Letters, Elsevier, vol. 46(PA).
    3. Isaac Marcelin & Daniel Brink & David Oluwatosin Fadiran & Hammed Adedeji Amusa, 2019. "Subsidized labour and firms: Investment, profitability, and leverage," WIDER Working Paper Series wp-2019-50, World Institute for Development Economic Research (UNU-WIDER).
    4. Marcelin, Isaac & Stephen, Sheryl-Ann K. & Fanta, Fassil & Tecklezion, Mussie, 2019. "Political regimes, investment and electoral uncertainty," Research in International Business and Finance, Elsevier, vol. 47(C), pages 580-599.

    More about this item

    Keywords

    Collateral spread; credit; institutions; law and finance; G21; D43; E32;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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