Mutual Guarantee Institutions And Small Business Finance

A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, the authors show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs).