Corruption In Lending Research Articles

Collectivism and Corruption in Commercial Loan Production: How to Break the Curse?

Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper, we address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect. We find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions. Our findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.

Corruption in Bank Lending: The Role of Timely Loan Loss Provisioning

Building on the recent literature on corruption in bank lending, we examine the effect of country-level timely loan loss recognition by banks on lending corruption using a unique World Bank dataset that covers more than 3,600 firms across 44 countries. We find evidence consistent with timely loan loss recognition constraining lending corruption because it increases the likelihood of problem loans being uncovered earlier. In further analysis, we find timely loan loss recognition to be less associated with reduced corruption in countries where there is significant government ownership in the banking system and deposit insurance schemes. This evidence is consistent with timely loan loss recognition being less of a deterrent to lending corruption when banks are less disciplined by their capital providers.

Collectivism and Corruption in Commercial Loan Production: How to Break the Curse?

Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper we address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect. We find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions. Our findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.

Collectivism and corruption in bank lending

This paper examines how national culture, and collectivism in particular, influences corruption in bank lending. We hypothesize that interdependent self-construal and particularist norms in collectivist countries lead to a higher level of lending corruption through their influence both on the interactions between bank officers and bank customers and on the dynamics among bank colleagues. Using a sample covering 3835 firms across 38 countries, we find strong evidence that firms domiciled in collectivist countries perceive a higher level of lending corruption than firms domiciled in individualist countries. In terms of economic magnitude, the effect of collectivism is substantially larger than the effects of other cultural dimensions (uncertainty avoidance, masculinity, and power distance) and institutional factors identified in prior studies (bank supervision, bank competition, information sharing, and media monitoring). We further find that the positive relationship between collectivism and lending corruption is not driven by endogeneity, and that it is robust to different measures of bank corruption, different measures of collectivism, and different estimation methods. Finally, we find that the link between collectivism and lending corruption cannot be explained by the role of the government in the economy, political connections, biased responses from disgruntled borrowers, or relationship lending.

Collectivism and Corruption in Bank Lending

This paper examines how national culture, and collectivism in particular, influences corruption in bank lending. We hypothesize that interdependent self-construal and particularist norms in collectivist countries lead to a higher level of lending corruption through their influence both on the interactions between bank officers and bank customers and on the dynamics among bank colleagues. Using a sample covering 3835 firms across 38 countries, we find strong evidence that firms domiciled in collectivist countries perceive a higher level of lending corruption than firms domiciled in individualist countries. In terms of economic magnitude, the effect of collectivism is substantially larger than the effects of other cultural dimensions (uncertainty avoidance, masculinity, and power distance) and institutional factors identified in prior studies (bank supervision, bank competition, information sharing, and media monitoring). We further find that the positive relationship between collectivism and lending corruption is not driven by endogeneity, and that it is robust to different measures of bank corruption, different measures of collectivism, and different estimation methods. Finally, we find that the link between collectivism and lending corruption cannot be explained by the role of the government in the economy, political connections, biased responses from disgruntled borrowers, or relationship lending.

Media ownership, concentration and corruption in bank lending

Building on the pioneering study by Beck, Demirguc-Kunt, and Levine (2006), this study examines the effects of media ownership and concentration on corruption in bank lending using a unique World Bank data set covering more than 5,000 firms across 59 countries. We find strong evidence that state ownership of media is associated with higher levels of bank corruption. We also find that media concentration increases corruption both directly and indirectly through its interaction with media state ownership. In addition, we find that media state ownership and media concentration both accentuate the positive link between official supervisory power and lending corruption and attenuate the negative link between the regulations that empower private monitoring and corruption in lending. Media state ownership or media concentration also accentuates the positive link between banking concentration and corruption in lending. Furthermore, the links between media structure and corruption are more pronounced when the borrowing firm is privately owned.

Does corruption hamper bank lending? Macro and micro evidence

The aim of this paper is to analyze the effect of corruption in bank lending. Corruption is expected to hamper bank lending, as it is closely related to legal enforcement, which has been shown to promote banks’ willingness to lend. Nevertheless the similarities between the consequences for bank lending of law enforcement and corruption are misleading, as they consider only judiciary corruption. Corruption can also occur in lending and may then be beneficial for bank lending via bribes given by borrowers to enhance their chances of receiving loans. This assumption may be validated particularly in the presence of pronounced risk aversion by banks, resulting in greater reluctance on the part of banks to grant loans. We perform country-level and bank-level estimations to investigate these assumptions. Corruption reduces bank lending in both sets of estimations. However, bank-level estimations show that the detrimental effect of corruption is reduced when bank risk aversion increases, even leading at times to situations wherein corruption fosters bank lending. Additional controls show that corruption does not increase bank credit by favoring only bad loans. Therefore, our findings show that while the overall effect of corruption is to hamper bank lending, it can alleviate firm’s financing obstacles.

Media Ownership, Concentration and Corruption in Bank Lending

Building on the pioneering study by Beck, Demirguc-Kunt and Levine (2006), we examine the effects of media ownership and concentration on corruption in bank lending. Using the unique World Bank dataset covering more than 5,000 firms across 59 countries, we find strong evidence that that state ownership of media is associated with higher levels of bank corruption. We also find that media concentration increases corruption both directly and indirectly through its interaction with media state ownership. In addition, we find that media state ownership and media concentration both accentuate the positive link between official supervisory power and lending corruption and attenuate the negative link between the regulations that empower private monitoring and corruption in lending. Furthermore, the links between media structure and corruption are more pronounced when the borrowing firm is privately owned.

Does Corruption Hamper Bank Lending? Macro and Micro Evidence

The aim of this paper is to analyze the effect of corruption in bank lending. Corruption is expected to hamper bank lending, as it is closely related to legal enforcement, which has been shown to promote banks’ willingness to lend. Nevertheless the similarities between the consequences for bank lending of law enforcement and corruption are misleading, as they consider only judiciary corruption. Corruption can also occur in lending and may then be beneficial for bank lending via bribes given by borrowers to enhance their chances of receiving loans. This assumption may be validated particularly in the presence of pronounced risk aversion by banks, resulting in greater reluctance on the part of banks to grant loans. We perform country-level and bank-level estimations to investigate these assumptions. Corruption reduces bank lending in both sets of estimations. However, bank-level estimations show that the detrimental effect of corruption is reduced when bank risk aver-sion increases, even leading at times to situations wherein corruption fosters bank lending. Additional controls show that corruption does not increase bank credit by favoring only bad loans. Therefore, our findings show that while the overall effect of corruption is to hamper bank lending, it can alleviate firm’s financing obstacles.

Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing

Building on the important study by Beck, Demirguc-Kunt, and Levine [2006. Bank supervision and corruption in lending. Journal of Monetary Economics 53, 2131-2163], we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus/registries on corruption in bank lending. Using the unique World Bank data set (WBES) covering more than 4,000 firms across 56 countries with information on credit bureaus/registries, assembled by Djankov, McLiesh, and Shleifer [2007. Private credit in 129 countries. Journal of Financial Economics 84, 299–329], and bank regulation data collected by Barth, Caprio, and Levine [2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, New York] to measure bank competition and information sharing, we find strong evidence that both banking competition and information sharing reduce lending corruption, and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption. We also find that the ownership structure of firms and banks, legal environment, and firm competition all exert significant impacts on lending corruption.

Corruption in Bank Lending to Firms: Do Competition and Information Sharing Matter?

Extending the important study by Beck, Demirguc-Kunt and Levine (2007), we examine the effects of borrower and lender competition and information sharing via credit registries/bureaus on corruption in bank lending. Using the unique dataset of the World Business Environment Survey (WBES) compiled by the World Bank, and information on credit registries/bureaus and bank regulation assembled by other scholars, we find (1) strong evidence that banking competition reduces lending corruption and (2) the first and robust evidence that information sharing among banks is conducive in reducing corruption in bank lending. We also find that government- and foreign-owned firms as well as exporting firms tend to be subject to less lending corruption, objective courts and better law enforcement tend to reduce lending corruption, private and foreign ownership of the banking industry are associated with more integrity in lending, and that more private monitoring of banks helps to curtail lending corruption. These findings are consistent with the predictions of a Nash bargaining model.

Bank supervision and corruption in lending

Which commercial bank supervisory policies ease—or intensify—the degree to which bank corruption is an obstacle to firms raising external finance? Based on new data from more than 2500 firms across 37 countries, this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms’ financing obstacles. We find that the traditional approach to bank supervision, which involves empowering official supervisory agencies to monitor, discipline, and influence banks directly, does not improve the integrity of bank lending. Rather, we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions.