Informal collateral and default risk: do 'Grameen-like' banks work in high-income countries?

We study collateralization strategy and effects on the ex post loan performance of a European 'Grameen-type' bank which mainly finances small firms or microfirms and seeks to reconcile economic sustainability with social goals. Our analysis on individual loan data documents that the bank has a remarkably low share of nonperforming loans in spite of an extremely high share of uncollateralized loans (around 42%). Econometric findings document that collateralization depends positively on ex ante borrower's risk (proxied by nonperforming past track record) and negatively on relationship lending. In this regard, the originality of the bank's policy is that of lending to small borrowers which belong to larger networks and consortia with which the bank has a long history of relationships. The incentive effect seems to work because collateralized borrowers are riskier ex ante, but not ex post.