Distance Constraints: The Limits of Foreign Lending in Poor Economies

Distance Constraints: The Limits of Foreign Lending in Poor Economies

  • ATIF MIAN

Article first published online: 16th May 2006 DOI: 10.1111/j.1540-6261.2006.00878.x

Abstract


How far does mobility of multinational banks solve problems of financial development? Using a panel of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's headquarters and local branches leads it to further avoid lending to “informationally difficult” yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. These distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks.

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