Lending corruption and bank loan contracting: Cross-Country evidence

Abstract

Using World Bank survey data, we document that banks extend more favorable loan terms to borrowers in countries with more lending corruption. This relation is stronger when borrowers have financing constraints but weaker in countries with stronger monitoring of foreign bank ownership or with stronger religiosity. We also find that banks in countries with high lending corruption have poor loan quality and earnings performance and are more susceptible to trouble during a financial crisis. Overall, our findings suggest that corruption “greases the wheels” for borrowers but is detrimental to bank shareholders.