Loan Allocation Research Articles

Foreign bank entry, credit allocation and lending rates in emerging markets: Empirical evidence from Poland

Earlier studies have documented that foreign banks charge lower lending rates and interest spreads than domestic banks. We hypothesize that this may stem from the superior efficiency of foreign entrants that they decide to pass onto borrowers (“performance hypothesis”), but could also reflect a different loan allocation with respect to borrower transparency, loan maturity and currency (“portfolio composition hypothesis”). We are able to differentiate between the above hypotheses thanks to a novel dataset containing detailed bank-specific information for the Polish banking industry. Our findings demonstrate that banks differ significantly in terms of portfolio composition and we attest to the “portfolio composition hypothesis” by showing that, having controlled for portfolio composition, there are no differences in lending rates between banks.

Auswirkungen der europäischen Basel III-Umsetzung auf die Kreditvergabe deutscher Genossenschaftsbanken

Zusammenfassung Der vorliegende Aufsatz beschäftigt sich mit den wichtigsten Aspekten der neuen CRD IV-Verordnung und deren Auswirkungen auf die deutschen Genossenschafts­banken. Es wird darauf eingegangen, wie die neuen Anforderungen auf die Ergebnis­steuerung, Kreditvergabe, Konditionierung und Depot-A-Steuerung wirken. Die Ergebnisse werden im Kontext der Wettbewerbssituation beleuchtet und darauf auf­bauend differenzierte Handlungsalternativen erläutert.

An evaluation of Iranian banking system credit risk: Neural network and logistic regression approach

The current study seeks to provide a new solution for evaluation of banking system customers risk by integrating different scientific methodology. Evaluation of banking system customers risk in Iranian banks relies on experts judgment and fingertip rule. This type of evaluation resulted in high rate of postponed claims; therefore, designing new intelligent model for credit risk evaluation will be helpful, thus in this paper, we formulated an intelligent model by neural network and logistic regression that evaluated all individual customers credit risk without prejudice and discrimination. The result revealed that neural network and logistic regression have the same ability in predicting customer credit risk. Their ability in customer credit risk correct evaluation was nearly 79.50%. We suggested that both models could be used by all financial system as consultant model for customer credit risk prediction. The study also involved only one banking system credit customers, which concerns just Tehran city customers and its sample includes only individual customers, thus cannot be for institutional customers. Offering a case study, this paper presents a guide for banking system to predict any customer credit risk and regulate any customer loan in the light of customer risk that was extracted by neural network, and logistic regression employed different scientific methodologies in their service quality development efforts. Intending to offer scientific approaches to risk evaluation as a tool of customer credit risk assessment in banking system loan allocation procedures, this paper tries to bridge the current gap between academicians and practitioners; adds to the relatively limited theoretical literature. Key words: Credit allocation, neural network, multilayer perceptron, logistic regression.

Syndicated Loans: The Role of Covenants in Mitigating Lender Disagreements

We study the role of covenants in syndicated bank loans. We argue that, in addition to being a device for monitoring the borrower, covenants can help mitigate conflicts of interest between the lead-arranger and participating banks in the syndicate. Such disagreements can arise when, for instance, a lead-arranger has the incentive to support a poorly performing borrower and offer loan modification – while other syndicate lenders do not. We develop a simple model and find empirical support for its predictions that covenants are less likely to be present: (i) in non-syndicated versus syndicated loans; (ii) when the lead's loan allocation is greater and (iii) when participating bank affiliates hold substantial equity in the borrower. Consistent with this evidence, we find that lead arrangers are more likely to syndicate with banks that hold borrower equity through affiliated entities.

The Role of Covenants in Mitigating Conflicts of Interest Within Lending Syndicates

We study the role of covenants in syndicated bank loans. We argue that, in addition to being a device for monitoring the borrower, covenants can help mitigate conflicts of interest between the lead arranger and participating banks in the syndicate. Such disagreements can arise when, for instance, a lead arranger has the incentive to support a poorly performing borrower and/or offer loan modifications while other syndicate lenders may prefer to discipline the borrower by accelerating the loan or enforcing default. We develop a simple model reflecting such conflicts and find empirical support for its predictions that covenants are less likely to be present: (i) in non-syndicated versus syndicated loans; (ii) when the lead's loan allocation is greater; and (iii) when participating bank affiliates hold substantial equity in the borrower. Consistent with this evidence, we find that lead arrangers are more likely to syndicate with banks that hold borrower's equity through affiliated entities.

Distribution orientation and driving mechanism of geographical pattern change of China’s banking industry

By analyzing the relationship among government, market driving forces, distribution orientation of banking industry, service opportunity equality and spatial patterns, this paper proposes that it is distribution orientation that lead to the formation and evolution of spatial pattern of banking industry. The difference of the distribution orientation leads to the separation of the spatial pattern of banking industry, and the change of the distribution orientation leads to the change of spatial pattern. The degree of spatial pattern change is subject to the degree of change of distribution orientation, and the scale of bank resources in the regions, which supports the distribution orientation variation. Based on these theoretical frameworks, some indicators were designed to analyze the pattern change of China’s banking industry and its effects since 1995 under the change of the distribution orientation. This paper finds that the orientation of economic benefit maximization driven by market causes the banking industry to concentrate in economically developed regions. The government, which does not follow the orientation of economic benefit maximization, plays a role of stabilizer. Since the bank branches in the regions with the greatest change in bank branch distribution are too few, and regions with the greatest change in bank loan allocation are the regions with lots of loans, the pattern change of the banking industry in physical form is not as notable as that in economic form.

Credit to Women Entrepreneurs: The Curse of the Trustworthier Sex

Women entrepreneurs are known not only to reimburse loans swifter than men, but also to receive smaller loans. However, on average women have smaller-scope business projects and are poorer than men. A deeper investigation is thus required in order to assess the existence of gender discrimination in small-business lending. This is precisely the aim of this paper. Its contribution is twofold. Firstly, it proposes a new estimation method for assessing discrimination in loan allocation. This method operationalizes the theoretical “double standard” approach developed by Ferguson and Peters (1995, Journal of Finance). Secondly, this paper applies the new methodology to an exceptionally rich database from a Brazilian microfinance institution. The empirical results point to gender discrimination. Additionally, it is shown that reducing the information asymmetry through relationship brings no remedy to the curse of the trustworthier sex.

Equity and Access to University Education through Higher Loans in Bungoma District Kenya.

University student loans were introduced in Kenya with the aim of easing the burden of public expenditure in higher education. In the initial years the loans were to benefit all students enrolled at University irrespective of their socio-economic backgrounds. The beneficiaries were expected to repay the loan later upon getting into employment. This mode of funding eventually became unpopular both to the government and the international donor community because of the inherent negative social implications. Consequently, the higher Education Loan Board (HELB) was formed through an Act of Parliament in 1995 and was mandated to disburse loans and recover the same from the former beneficiaries. However, HELB has severally been attacked of inability to consider the genuinely deserving cases. It is in the light of these criticisms that this study was carried out to determine the level of inequalities in the allocation of HELB loans to the recipients. Besides helping the researchers to develop insights into research work, this study uses the Lorenz Curves and Gini- coefficients as tools for determining inequalities in student loan allocations. This study was guided by the theory of socialist economics of education, propounded by Louis Blanc in the 19th century. This theory underlines the need to create an economy that redistributes income from the rich to the poor, so as to create equality of well-being. The study was carried out in Bungoma district and it involved 161 undergraduate loan recipients in the 2000/2001 first year undergraduate cohort from the six public universities, 161 parents, 2 academic registrars in the public universities and the manager of the loan Disbursement and recovery at HELB. Samples for the study were selected using purposive and quota sampling techniques. The population of the study comprised of; 275 undergraduate loan recipients in the cohort, 275 parents, 6 academic registrars and the loan disbursement and recovery manager at HELB. Data was collected using questionnaires and interview schedules. The data collected were analyzed by both the descriptive and inferential statistics. The income share tables, Lorenz curves and the Gini coefficients were used to determine the level of inequality in the provision of loans to the recipients. The findings to this study revealed the following; the amount of HELB loan allocation increased over the four academic years. The number of male students who benfitted from the HELB loan was higher than that of the female students. Majority of the loan recipients in the district were from the medium socio-economic background. There were small inequalities in the provision of the loans, however, these inequalities tended to reduce as the students in the cohort progressed through the four academic years. Recommendations considered essential with regard to ameliorating inequalities in the public universities were made and areas for further research were suggested. Key words: Access, bursary, efficiency, equity, public subsidy, socio-economic background, student loan.

International Real Estate Review

This paper tests for evidence of political manipulation in the allocation of subsidized mortgage loans in Mexico during the 1990’s. First, I develop a baseline model of loan allocation across states as a function of housing need, eligibility for lending programs, and administrative capacity to deliver housing. Then, I add measures of political competitiveness to the model. Empirical results suggest that the two largest lenders generally allocated loans according to their eligibility criteria, granting more loans to states with more income- and employment-eligible households and poorer quality housing. Tests for political manipulation suggest that more loans were, in fact, granted in federal election years and in states where the ruling party did not perform well in the previous election. However, the numbers lack statistical significance. As a result, it can be assumed that political motivation played a relatively small role in the allocation of loans.

Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714

This article studies the effects of interest rate restrictions on loan allocation. The British government tightened the usury laws in 1714, reducing the maximum permissible interest rate from 6% to 5%. A sample of individual loan transactions reveals that average loan size and minimum loan size increased strongly, while access to credit worsened for those with little social capital. Collateralised credits, which had accounted for a declining share of total lending, returned to their former role of prominence. Our results suggest that the usury laws distorted credit markets significantly; we find no evidence that they offered a form of Pareto-improving social insurance. Almost since the beginning of recorded history, usury restrictions have been widely used. The laws of Hammurabi from the 2nd millennium bc regulated interest rates, as did the Old Testament and the Catholic Church. While early rules often outlawed the taking of interest altogether, later restrictions stipulated maximum permissible interest rates. To the present day, many developing and Islamic countries and US states impose limits on private loan contracts to stamp out predatory lending by credit sharks; only recently Italy re-introduced a law against usurious credit contracts (Glaeser and Scheinkman, 1998; Blitz and Long, 1965; Homer and Sylla, 1996). The effects of usury regulation have remained controversial. Numerous scholars have argued that they had damaging consequences and that this conclusion applies to both

Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord

The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the U.S. and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well-capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from U.S. lending(which is predominately real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.

Utilisation of subsidy in a program-directed support of agricultural loans

The paper is focused on the performance measurement of the Support and Guarantee Fund for Farmers and Forestry (SGFFF) as the main instrument of capital reinforcement of Czech agricultural enterprise development. Its principles as well as the function from the point of view of agricultural enterprises, restructuring and allocation of resources and the reason why the subsidies of the supported loans’ interest rates have been employed are cleared up there. The results are discussed upon an analysis of the Fund’s activity. According to them, it can be claimed that the Fund has became an important part of supports for the agricultural sector development in the last ten years. From the point of view of the criteria of supported loans allocation, it was ascertained that the level of support has not been derived from the different natural and soil qualities primarily. The economic results and a high level of the prosperity have been evaluated as the main criteria for the decision-making system regarding an effective restructuring of agriculture and improving its competitiveness.

Donor influence in multilateral development banks: The case of the Asian Development Bank

This paper explores the influence of Japan and the United States over the geographic distribution of Asian Development Bank funds. Estimation using panel data for less developed Asian countries from 1968 to 2002 suggests significant donor influence with inconsistent weight placed on humanitarian criteria given limited funding for the region's largest countries, China and India. Comparing the results with research on World Bank loan allocation suggests donor interests are relatively more important in the ADB. This finding justifies the existence of the ADB on political grounds but calls into question its relative merits on economic grounds.

On US politics and IMF lending

The political factors shaping IMF lending to developing countries have attracted attention in recent empirical work. This goes in particular for the role and influence of the US. However, scant formal modelling makes interpretation of empirical results difficult. In this paper, we propose a model in which the US acts as principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive an optimal loan allocation mechanism, which leads to the testable hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country's bliss point and its actual policy stance measured relative to the US. We introduce a bliss-point proxy and demonstrate that our hypothesis is strongly supported in the data. Moreover, we show that not accounting for bliss points may lead to endogeneity bias in empirical work.

Microfinance Repayment Performance in Bangladesh: How to Improve the Allocation of Loans by MFIs

The aim of this article is to produce a comprehensive analysis of the performance of microfinance institutions (MFIs) in terms of repayment. We focus the analysis on the impact of group lending, nonfinancial services and dynamic incentives on repayment performance. We test for endogeneity of loan size and use instrumental variables to correct for it. In the second section of the paper, we use a comparative analysis of the determinants of the repayment performance and of loan size in order to make policy recommendations on the allocation of loans by MFIs.

The Determinants of Foreign Aid Allocation across China: The Case of World Bank Loans

This paper studies the determinants of the provincial allocation of World Bank loans during the reform era in China. It shows that neither humanitarian concerns nor donors' commercial interests are a significant determinant. The central leadership's preferences and provincial bureaucrats' interests together explain most of China's use of foreign aid.

Neighborhood Patterns of Subprime Lending: Evidence from Disparate Cities

This paper estimates, for 7 cities, a model of prime versus subprime allocation of loans in 1997 and 2002 based on both individual loan and neighborhood attributes. The paper is directly interested in the effect of neighborhood racial and ethnic composition on the likelihood of receiving a subprime loan. The paper also allows for interaction of borrower race and ethnicity with neighborhood attributes. A unique feature of the paper is that it provides additional neighborhood controls for the aggregate level of credit risk and the neighborhood level of equity risk. The paper finds some evidence for tightening loan standards over the 5-year period in the subprime market. In both years, even with risk controls, the minority share of neighborhood is consistently significant and positively related to subprime share. Furthermore, neighborhood education level is consistently significant and negatively related to subprime lending.

Double-Standards, Debt Treatment, and World Bank Country Classification: The Case of Nigeria

Nigeria is currently classified by the World Bank as a ‘blend’ country, making it the poorest country in the world that does not have ‘IDA-only’ status. This paper uses the World Bank’s own IDA eligibility criteria to assess whether Nigeria has a case for reclassification. Given that the country has not borrowed from IBRD for the past eleven years, such a change would merely recognize what is already de facto the case. Based on our analysis, Nigeria clearly qualifies as IDA-only based on its low income level and lack of creditworthiness. Its record of policy performance appears to be the final barrier, but we show it is no worse on performance than three African comparator groups: the current IDA-only pool, previous reverse-graduates, and the IDA-only oil producers. We also question the logic of this criterion for IDAonly ‘eligibility’ (though not of course for actual allocation or disbursements). Certainly, Africa’s three previous reverse-graduates and Angola’s current IDA-only status suggest that Nigeria is facing a doublestandard. We thus conclude that Nigeria does have a strong case for reclassification. Nigeria has good reason to request such a change as it would allow it more equal consideration of its access to IDA grants (restricted to IDA-only countries) including for HIV/AIDS programs and its allocation of IDA loans. Reclassification would also strengthen the case for Nigeria receiving an immediate write-down of a large portion of its debt to bilateral donors (along the lines of concessional Naples terms for IDA-only countries), which we argue is critical to any hope that the current government’s economic and political reform efforts can be sustained. The creditors have good reason for supporting such a change as part of a broader strategy for encouraging progress in Africa’s most populous country, and one that is key to stabilizing a region where internal conflict and Islamic radicalism create threats to global security.

BIS Capital Standards and Supply of Bank Loans

The regulatory capital standards for banks have moved towards risk based approaches ever since the Bank for International Settlements (BIS) sponsored Basle Capital Accord of 1988 has been implemented. The Basle Accord linked the capital requirement of banks to the risk of the assets of the bank with risk weights assigned to different asset categories. The Basle Accord was partly in response to a series of international bank failures and concern over unequal national capital standards. The Basle Accord was questioned on several fronts. One issue that received attention of researchers was whether the Basle Accord was responsible for the global economic slowdown in the early 1990s. The empirical evidence on the impact of BIS capital standards on bank asset allocation is mixed. While some studies find evidence of banks reducing their loan allocation (Shrieves and Dahl (1992), Nigro and Jacques (1997) and Aggarwal and Jacques (1997), Rime (1998), Peek and Rosenberg (1997)) others such as Burger and Udell (1994), find results inconsistent with the proposition that capital pressure was the origin of the US credit crunch in the early 1990s. In this paper, a two period model of a bank is used to analyze the impact of bank asset allocation decision under minimum capital adequacy requirement. In period zero, the bank has no minimum capital requirements and banks allocate resources in period zero to meet cash reserve requirement (CRR) and a treasury investment requirement, which in India is referred to as the statutory liquidity requirement (SLR) both of which are imposed by the regulator. Since yield on loans is higher than the yield on treasury investments, a revenue maximizing bank would allocate the maximum assets to loans after meeting the minimum regulatory CRR and SLR norms. In period one, the bank is faced with an additional regulatory burden in the form of a minimum capital adequacy ratio. The bank has to choose to allocate its assets so as to maximize revenue subject to the CRR, SLR and minimum capital adequacy constraint. It is found that while the initial capital level has a positive effect on loan allocation, minimum capital adequacy requirement is negatively related to loan allocation. The other results are that the efficiency of the bank, which is captured by the return on assets ratio, has a positive impact on loan allocation while the risk weight on loans have a negative effect on the supply of loans. The results of the optimization exercise show that when the bank is severely capital constrained such as when the initial capital ratio is 6%, and the minimum capital adequacy ratio is 9%, the bank would reduce the supply of loans. This shows that capital constrained banks would reduce the supply of loans. Regulators while designing and implementing risk based capital standards would need to balance the concerns regarding bank safety with the availability of bank credit in the economy.

Neighborhood patterns of subprime lending: Evidence from disparate cities

This article estimates a model of prime versus subprime allocation of loans for seven cities in 1997 and 2002; the model is based on both individual loan and neighborhood attributes. Of immediate interest is the effect of neighborhood racial and ethnic composition on the likelihood of receiving a subprime loan. We also allow for the interaction of borrower race and ethnicity with neighborhood attributes. A unique feature of our study is that it provides additional neighborhood controls for the aggregate level of credit risk and the neighborhood level of equity risk. We find some evidence of tightening loan standards in the subprime market over this five‐year period. Even with risk controls, the neighborhood minority share is consistently significant and positively related to subprime share in both years. Furthermore, the neighborhood educational level is consistently significant and negatively related to subprime lending.