Loan Pushing and Triadic Relations

Abstract

This paper is an attempt to define and explore the phenomenon of loan pushing in international lending in the 1970s. The earliest descriptions of loan pushing are anecdotal; this paper surveys the various facets that emerge from these anecdotes and suggests a possible definition that serves as the basis for a theoretical model. This model, inspired by the confessions of a banker, explores a triadic relationship between a corporation in the lender country, the lender bank, and a borrower in a developing country and suggests that a rational, profit maximizing commercial bank could end up pushing loans on to the borrower. Changes in international commercial banking in the 1970s that facilitated this type of loan pushing are discussed next. To the extent that the loan pushing doctrine is valid, it implies that the commercial banks were at least as responsible for the massive lending boom of the 1970s as the borrowers and should have been made to bear the cost of adjustment as well. The process of sovereign lending in the 1970s appears to consist of voluntary and mutually agreeable contracts between the transnational commercial banks and credit-seeking developing countries. The suggestion that there could be in this process an element of aggressiveness on the part of the commercial banks that actively and systematically pushed loans on to developing country borrowers, may at first sight, seem inconceivable. If a borrower voluntarily enters into a loan contract, he is obviously doing so because the contract is beneficial. If such is the case, then would it be correct to characterize the process as one of loan pushing? Also, the commercial banks are supposed to be rational profit maximizers. Thus, the amount of lending cannot be more than optimal. What then is meant by loan pushing? These are a few questions that immediately come to mind. It has been argued that international credit can contribute to increasing donor exports. (See, for instance, Winkler 1929; Hyson and Strout 1968; Gwynne 1983; Taylor 1985; Darity and Horn 1988; Basu 1991; Basu and Deshpande 1995.) This is indeed one of the arguments used to explain the phenomenon of loan pushing (however, not the only one). The aim of this paper is to explore the idea of loan pushing a little more deeply by first trying to understand the concept along with a brief review of the literature in the area (section 2). The confessions of a young banker (Gwynne 1983) provide the basis of the theoretical model (section 3), which considers a triadic relationship between a commercial bank in a creditor country, a debtor (nation), and a corporation in the creditor country and the compulsions of loan pushing arising