Lending Relationship in the Traditional Credit Market — Implications for Credit Risk Management Strategy in Micro Credit Institutions

Abstract

Asymmetric information increases the credit rationing of micro-enterprises. Lender–borrower relationships help to provide this information, thereby increasing the availability of loans. This study aims to investigate the relationship between micro-lenders and micro clients. It is accomplished by describing how such relationships are developed, and analyzing these relationships’ impact on the availability and credit term using multivariate regression. The results showed that the strength of lender–borrower relationships positively impacted credit access, but it did not significantly impact the credit term. Furthermore, the amount of income and loan purpose, as the proxies of business characteristics, negatively impacted credit access. These results highlight the critical role of the lender–borrower relationship and business characteristics in the risk management strategy and the sustainability of microfinance institutions.