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

This paper provides evidence that commercial lenders in Peru free ride off their peers' screening efforts

From:
Foreign, Commonwealth & Development Office
Published
3 December 2019
Country:
Peru
Document Type:
Working Paper
Theme:
Economic Growth
Authors:
Arraiz, I, Bruhn, M, Roth, B.N, Ruiz Ortega, C and Stucchi, R M

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.

This is an output of the World Bank’s Strategic Research Program

Citation

Arraiz, Irani; Bruhn, Miriam; Roth, Benjamin N.; Ruiz Ortega, Claudia; Stucchi, Rodolfo Mario. (2019). Free Riding in Loan Approvals : Evidence from SME Lending in Peru . World Bank Policy Research working paper; no. WPS 9072

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

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Published 3 December 2019
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