Lending Corruption and Bank Loan Contracting: Cross-Country Evidence

Abstract

Lending corruption is an important agency problem for banks. Using data from the World Bank Business Environmental Survey, we find that in countries with more corruption, banks give more favorable loan terms to borrowers. This relation is stronger when firms are under more financing constraints, consistent with corruption being important to obtaining favorable loan terms when the supply of debt capital is tighter. In line with the expectation that monitoring constrains agency problems, this relation is weaker in countries with higher foreign ownership of banks or where Protestantism is the primary religion. In the syndicated loan market, participant banks are inclined to lend less in countries where lending corruption is more prevalent. Firms in countries with greater corruption prefer private bank debt over public bonds and are more leveraged. Banks in countries with more lending corruption have poor loan quality, worse 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.

Corruption, lending and bank performance

“…This result is consistent with Jiang et al (2018) in which lower corruption is found to moderate loan growth and higher corruption makes loan terms more favorable to lenders. 11 Table 4 on the other hand, summarizes the results of applying equation (2).…”

“…On balance, however, there is stronger evidence in the literature on the "sand in the wheels" compared to the "grease the wheels" viewpoint. Jiang et al (2018) propose a "protection against risk" hypothesis to explain the effect of corruption on loan growth. Under this hypothesis banks in countries where bribing bank officials is common, lending policies will be tightened because lenders have greater pre-contracting expectations that corruption at the bank official level will increase costs.…”

Challenges of accountability in Nigeria: the role of deposit money bank

“…The disposition of the banks, in aiding and abetting corrupt government officials to steal public funds and providing a haven for them to hide their illicit fund or legalise the proceed of corruption because of their drive for profit is the motivation for this study. Previous studies have examined bank lending corruption and various dimension and consequences (Barth et al , 2016; Barry et al , 2016; and Jiang et al , 2018). The uniqueness of this study from previous studies on corruption in the banking sector is that it fills the gap in the literature on the other side (i.e.…”

“…Also, the stronger regulatory environment was effective in the case of family-owned bank-induced corruption but not sufficient for state-owned bank-induced corruption. Jiang et al (2018) examined the influence of lending corruption on bank loan contracting using World Bank business environment survey. They found that the bank gave favourable loan term to borrowers with higher financial constraints in countries with more lending corruption.…”

“…World Bank, in 2017, reported that businesses and individuals pay a significant amount as bribe each year estimated to about 2 per cent of total world gross domestic product (GDP) and ten times the value of Oversea Development Assistance (ODA). The negative impact of corruption on the global economy far outweighs the estimated cash volume with an attendant consequence on economic growth and development (Jiang et al , 2018). Issues of corruption are not only prevalent in low-income countries; they cut across all the regions of the world, but their severity is felt most in low-income developing nation where corrupt government official trample on people fundamental right with impunity.…”