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For approximately a century and a half after their dramatic deflation, the South Sea and Mississippi Bubbles of 1710–1720 had discredited finance. With the exception of government bond markets and a few chartered companies, the rapid rise and fall of fortunes associated with the South Sea Company, in Britain, and the Mississippi Company in France, had made the joint stock system of corporate finance almost synonymous with fraud and financial debauchery. (The most authoritative account of these schemes is given in Murphy, 1997.) The joint stock system of finance was seen as seriously flawed, and an indictment of the theories on credit money of the schemes’ instigator, John Law. During those one hundred and fifty years, classical political economy rose and flowered. Not surprisingly finance then came to be considered for its fiscal and monetary consequences. This pre-occupation left its mark on twentieth-century economics in an attitude that the fiscal and monetary implications of finance, eventually its influence on consumption, are more important than its balance sheet effects in the corporate sector. This attitude is apparent even in the work of perhaps the pre-eminent twentieth century critical finance theorist, John Maynard Keynes.

It is commonly believed that banks are in special need of regulation to prevent financial crises, and the recent sub-prime crisis would tend to support such views. Yet it is clear that a series of perverse incentives exist in the banking industry. Incentives for bankers to take on too much risk lead to financial crises, and then a lack of a bankruptcy process for large financial institutions lead to massive taxpayer bail-outs. This chapter canvasses the issues surrounding the sub-prime crisis and explores arguments relating to regulation and the political economy of the recent crisis. As long as the political cost-benefit of having inefficient banking regulation dominates an economic cost-benefit of having efficient regulation, we can expect that perverse incentives will remain and financial crises will be a regular feature of the economic landscape.

Recent studies on the use of private, non-bank, debt have given conflicting results. Instead of a fixed order of preference between various choices of debt as suggested by previous studies, this study postulates that there is a life cycle of debt choice, and as firms move through the cycle, their preferences change. For stable, mature firms, when given a choice, non-bank private debt would fall in between the two extremes of bank debt and public debt. We provide empirical as well as anecdotal evidence from the trade press to support this view. We jointly model the decision to choose a debt source as well as the amount of debt on data from a current database to focus on the “intentional” change in debt levels, rather than those due to unintentional changes. We find that there are significant interdependencies between the decision to borrow from a particular source, as well as the amount of loan, and that taxes, as well as lender reputation, degree of renegotiability and financial flexibility required by the borrower, are key factors that influence the choice of private debt source.

Since initial demonstrations that categories are consequential for evaluation, scholars of organizations and markets have attended to dynamics in audience evaluations of category spanning. We consider how heterogeneity in evaluator engagement in a market may alter their evaluation of atypical candidates. In markets where evaluators self-propagate theories of diversification, atypical candidates are advantaged because they present a distinct and efficient opportunity to diversify. We argue that evaluator market engagement will (positively) moderate valuations of atypicality, as such evaluators will be better positioned to recognize atypical candidates and their alignment with prevailing theories of value. We find support for our contentions with data from an online peer-to-peer lending market, Prosper.com. Consistent with our hypothesis, we find that lender evaluation of these atypical borrowers is increasing in their market engagement: whereas lenders new to the market devalue atypical candidates, those who have made many evaluations evaluate atypicality positively.

This chapter challenges a commonly accepted view such that the increase in monetary supply aiming to lower the market rate and/or aiming to ease liquidity conditions would encourage the banks as financial intermediaries or the investors as fund providers to provide more funds, which results in stimulating the macro-economy. This chapter suggests that there is no clear-cut mechanism in the economic theory for underpinning the commonly accepted view upon which the Quantitative Easing policy is based. This theoretical analysis suggests that there may exist an appropriate level of market reference rate, which can encourage the investors to absorb the relatively wider range of credit risk in the bond market. Extremely higher market rate would discourage the borrowers to raise funds, while lower market rate would drain “risk” funds in the bond market. In this context, the appropriate level of market rate may stand on a narrow range of the kind of “knife-edge,” though the level per se does not always guarantee the optimal allocation of financial resources.

This chapter explores the determinants of satisfaction of the Islamic microcredit borrowers in Bangladesh. A total of 245, mostly educated and young, borrowers of rural development scheme, the largest Islamic microcredit institution (MCI) in the world, were included in a survey using a structured questionnaire. Factors were extracted using exploratory factor analysis. Multiple regression analysis was conducted to identify influential determinants of satisfaction of microcredit borrowers. Borrowers have identified the activities and interaction in the “center,” which includes weekly/monthly meetings, investment-related training, and group performance review, as the most vital factor influencing their overall satisfaction. Competence of the microcredit staffs and officials is the second important determinant. Trust plays the next important role in overall satisfaction of the borrowers with the Islamic microcredit institutions. Convenience, of applying for loan, getting an approval, and paying instalments, is the other influential determinant of the borrower’s satisfaction. The findings imply that given the competition and social need of the Islamic microcredit institutions globally, policymakers must ensure greater investment in human capital, in creating awareness about products and services of the Islamic microcredits, and in initiating a prudent change in the regulation so that Islamic microcredit can become a tool for sustainable socioeconomic development. Use of a proper marketing strategy can also help the MCIs to support the financial inclusion policy of the government. Satisfaction of the borrowers of the Islamic microcredit institutions is yet to arrive in Islamic marketing literature. The proposed borrower-centric model can help reduce poverty and the internal loan-shark problem through adequate engagement of relevant stakeholders.

This study examines whether fintech lending further enhances or mitigates the gender-based differences in consumer loan performance in an emerging market. Using a proprietary dataset of over 5.5 million consumer loans offered by the fifth-largest bank in Turkey and its fintech subsidiary, the authors first document a significant gender gap in average loan performances. In line with the previous empirical findings, men are more likely to default on their debt. The average difference in loan performance is around 10 basis points, indicating a statistically and economically significant magnitude even after controlling for an exhaustive list of demographic and credit characteristics. Next, the authors show that the gender gap in loan performance is more pronounced in areas where women have more outside options in terms of social and economic opportunities. Specifically, the authors observe that gender-based differences are predominantly evident in cities with higher divorce rates, lower young and elderly dependence, smaller household sizes, and higher labor force participation of women. Since the child and elderly care duties disproportionately influence women’s ability to participate in economic life, their ability to find resources to pay their loans in a timely manner improves more in comparison to men in areas where women face fewer restrictions to seek local economic opportunities outside the household. Finally, the authors document that fintech loans partially mitigate the gender-based differences in consumer loan performance in those cities. This result suggests that the developments in financial technology can reduce the inefficiencies associated with human involvement in credit decisions, narrowing the gender gap in loan outcomes to the extent that these gaps are attributable to the supply-side factors that involve human judgment and biases.

This study examines whether knowledge about a loan applicant's auditor affects commercial loan decisions. The research questions addressed are: (1) whether a loan officer's familiarity with an applicant's audit firm affects lending decisions, and (2) whether an applicant is negatively impacted by having an audit firm with a history of associations with past borrowers who have defaulted or who have experienced financial statement restatements or regulatory enforcement actions. Participating loan officers were assigned to one of four treatment groups formed by manipulating the above two factors. They made risk assessments of the loan applicant as well as providing probabilities of granting credit. Results indicate that familiarity with a borrower's audit firm reduced assessments of risk associated with lending, but this did not appear to translate into increasing the likelihood that lenders would approve the line of credit. The study also finds an adverse impact on risk assessments and lending decisions when a borrower's audit firm has a negative history of associations with past borrowers.

As students increasingly incur debt to finance their undergraduate education, there is heightened concern about the long-term implications of loans on borrowers, especially borrowers from low socioeconomic backgrounds. Drawing upon the concepts of cultural capital and habitus (Bourdieu & Passeron, 1977), this research explores how student debt and social class intersect and affect individuals’ trajectory into adulthood. Based on 50 interviews with young adults who incurred $30,000–180,000 in undergraduate debt and who were from varying social classes, the findings are presented in terms of a categorization schema (income level by level of cultural capital) and a conceptual model of borrowing. The results illustrate the inequitable payoff that college and debt can have for borrowers with varying levels of cultural resources, with borrowers from low-income, low cultural capital backgrounds more likely to struggle throughout and after college with their loans.

This article estimates the loan spread equation taking into account the endogenous matching between banks and firms in the loan market. To overcome the endogeneity problem, I supplement the loan spread equation with a two-sided matching model and estimate them jointly. Bayesian inference is feasible using a Gibbs sampling algorithm that performs Markov chain Monte Carlo (MCMC) simulations. I find that medium-sized banks and firms tend to be the most attractive partners, and that liquidity is also a consideration in choosing partners. Furthermore, banks with higher monitoring ability charge higher spreads, and firms that are more leveraged or less liquid are charged higher spreads.