Credit information, consolidation and credit market performance: Bank-level evidence from developing countries

a r t i c l e i n f o Paying particular attention to the degree of banking market concentration in developing countries, this paper examines the effect of credit information sharing on bank lending. Using bank-level data from African countries over the period 2004 to 2009 and a dynamic two-step system generalised method of moments (GMM) estimation , it is found that credit information sharing increases bank lending. The degree of banking market concentration moderates the effect of credit information sharing on bank lending. The results are robust to controlling for possible interactions between credit information sharing and governance. Information asymmetry and poor contract enforcement lead to suboptimal credit market equilibrium (Stiglitz & Weiss, 1981). To the extent that these problems are endemic in underdeveloped countries, financial sector underdevelopment in these countries could be attributed to poor credit information about borrowers. Credit information sharing is therefore expected to facilitate lending decisions (Bennardo, Pagano, & Piccolo, 2010; Pagano & Jappelli, 1993), reduce loan default by increasing borrowers' incentive to repay (Padilla & Pagano, 1997, 2000), and increase competition which in turn leads to higher lending (Pagano & Jappelli, 1993). The benefits of information sharing are hypothesised to be particularly helpful in less consolidated or more competitive banking markets, where borrower credit information is dispersed (Marquez, 2002). Although recent empirical interest has been drawn to the potential benefits of credit information sharing on lending decisions, the moderating effect of banking sector consolidation has been largely ignored. In this paper I examine the effect of credit information sharing on bank lending in African countries. I further condition this effect on the extent of banking sector consolidation. This paper focuses on African countries for a number of reasons. The region exhibits record high levels of default. This, coupled with inadequate credit information and poor creditor rights protection, makes lending decisions within African banking markets a difficult task. Unsurprisingly, therefore, African banking markets remain dramatically underdeveloped, even compared to other developing countries (Honohan & Beck, 2007; Mylenko, 2007). Bank credit to the private sector in the region lags behind that of other regions. The region records the lowest credit penetration in the world (Mylenko, 2007) with less than 20% of households having access to formal banking services (Beck, Demirguc-Kunt, & Levine, 2009). A key feature to which Africa's financial sector under-development may be attributed is weak contract enforcement. With rule of law, regulatory …