Credit information sharing and cost of debt: Evidence from the introduction of credit bureaus in developing countries

• Published date: 01 November 2023
• Author: Samuel Fosu,Henry Agyei‐Boapeah,Neytullah Ciftci
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/fire.12361

DOI: 10.1111/fire.12361

ORIGINAL ARTICLE

Credit information sharing and cost of debt:

Evidence from the introduction of credit bureaus

in developing countries

Samuel Fosu1Henry Agyei-Boapeah2Neytullah Ciftci3,4

1University of SussexBusiness School,

University Sussex,Brighton, UK

2EssexBusiness School, University of Essex,

Colchester, UK

3Department of Business Administration,

Faculty of Economics and Administrative

Sciences, Hakkari University, Hakkari, Türkiye

4The PentlandCentre for Sustainability in

Business, Lancaster University, Lancaster, UK

Correspondence

Samuel Fosu,University of Sussex Business

School, University Sussex,Brighton, BN1 9SL ,

UK.

Email: s.fosu@sussex.ac.uk

Henry Agyei-Boapeah was previously

affiliated to the University of Nottingham,UK.

Fundinginformation

United ArabEmirates University, Grant/Award

Number: G00003367

Abstract

We investigate the effect of credit information sharing on

cost of debt, with particular focus on the introduction of

credit bureaus in developing countries. Using a large dataset

of firms from 28 developing countries overthe period 2004–

2019, we find that firms’ average cost of debt significantly

declines following the introduction of credit bureaus. This

finding is robust to an alternative measure of cost of debt,

several firm- and country-level controls and to firm- and

year-fixed effects. The reduction in cost of debt is more pro-

nounced for less transparent firms and for firms domiciled in

countries with weak institutional framework.

KEYWORDS

cost of debt, credit bureaus, information sharing, institutional qual-

ity,transparency

1INTRODUCTION

In the past two decades, motivated by the need to improve the availability of credit, several countries have imple-

mented credit information-sharing schemes. Between 2004 and 2018, more than 75 developing countries instituted

credit information-sharing schemes, and this arguably (partly) explains the burgeoning research on the economic con-

sequences of credit information-sharing schemes (Ayyagari et al., 2021; De Haas et al.,2021; M artinez-Peria& Singh,

2014). For instance, Ayyagariet al. (2021) investigate the effect of credit information sharing on job growth in devel-

oping countries, while De Haas et al. (2021) study how information sharing affects the microcredit market in Bosnia

and Herzegovina. We contribute to this strand of literatureby examining the impact of credit information sharing on

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© 2023 The Authors. The Financial Review published by Wiley PeriodicalsLLC on behalf of Eastern Finance Association.

Financial Review. 2023;58:783–810. wileyonlinelibrary.com/journal/fire 783

784 FOSU ET AL.

corporatecost of debt in developing countries, with a particular focus on the introduction of credit bureaus.1We further

investigate the moderatingrole of national institutional quality and firm opacity (i.e., lack of transparency). Due to the

institutional voids that characterize most developing countries such as weak legal structures and contract enforce-

ment mechanisms (Agyei-Boapeah & Machokoto, 2018;Rajan & Zingales, 1998; Tunyiet al., 2019), borrowers in such

countries face a higher cost of credit and may,therefore, benefit from credit information-sharing schemes.

In theory,by sharing credit information about borrowers, lenders can expect to mitigate several lending problems

including adverse selection, borrower hold-up, and agency costs which results in lower default rates in credit markets

(e.g., Klein, 1992; Padilla & Pagano, 2000; Pagano & Jappelli, 1993; Vercammen, 1995). Credit information sharing

gives banks easy access to information about the credit worthiness of new and potential borrowers to make safe

lending decisions and to effectively monitor borrower behavior.Existing evidence, rarely based on developing coun-

tries,supports this view by documenting that countries with functional credit information-sharing schemes experience

improved access to credit and reduced default rates (e.g., Brown et al., 2009; Fosu,2014; Fosu et al., 2020a; Houston

et al., 2010).

Other studies extend this literature by exploring the relationship between credit information sharing on the one

hand and credit constraints (e.g., Brown et al., 2009; Love & Mylenko, 2003; Martinez-Peria & Singh, 2014) or credit

intermediation cost (Fosu et al., 2020b) on the other hand. Despite the incremental contributions made byprior stud-

ies to this burgeoning literature, they have often focused on either bank-level outcomes or firms’ perceived credit

constraints. Thus far,there has been limited focus on firm-level observable outcomes. We seek to add to the literature

by linking credit information sharing to the firm’s actual cost of debt, measured at both real and nominal rates.

Linking credit information directly to the firm’s actual cost of debt is important for at least two reasons. First, most

firms in developing countries depend on bank loans (Gwatidzo & Ojah, 2014), so the cost of debt can be a critical con-

straint that affects firm growth and economic growth. Therefore, both managers and policymakers tend to be keenly

interested in the drivers of the corporate cost of debt which makesthe relationship between information sharing and

cost of debt a policy-relevant issue. Second, the firm’s actual cost of debt can easily be analyzed to permit a more

robust and objective analysis that is devoid of the subjective perceptions of firms’ constraints in Brown et al. (2009)

and Martinez-Peria and Singh’s (2014) survey measures. Besides directly linking information sharing to firms’ cost of

debt, we also draw from the institutional and information asymmetry theoretical perspectives to contend that our

primary hypothesis could be moderated bycountry-level institutional quality and firm-level transparency.

Our work relates to but also differs from the work of Martinez-Peria and Singh (2014). First, the authors of the

prior study examine how credit information-sharing systems impact firms’ access to finance and cover the interest

rates of firms’ most recent loans in their analysis. Therefore, their analysis considers the interest rates on specific

loans taken by firms and fails to capture the average cost of debt for firms that access multiple loans over a period

from the same or different financiers. We overcome this limitation by examining the averagecost of debt of firms,2

defined to include loans from all sources (banks as well as private and public lenders) that the firm has accessed. Next,

we cover a more recent sample period, 2004–2019 (compared to 2002–2013 in the prior study), which enables us to

capture the impact of information-sharing schemes introduced after 2009. Thus, our analysis includes recent schemes

introduced in countries such as Ghana, Indonesia, Jamaica, Jordan, Malawi, Nigeria, and Vietnam. Further,our reliance

on accounting data published in the annual accounts (vis-a-vis survey data) provides us with a larger panel dataset

for robust statistical analysis. For instance, due to the survey data limitation, Martinez-Peria and Singh (2014) could

not control for firm-fixed effects for most of their firms, which heightens omitted variable concerns in their empir-

ical analysis. Our panel dataset helps us to mitigate such econometric concerns. Last, we extend the prior study by

1We focus on credit bureaus instead of credit registries for these reasons: (1) credit bureaus are run by private sector firms that tend to be more efficient

in developingcountries than public sector-run organizations such as credit registries; (2) credit registries focus more on regulatory and supervisory matters

rather than directly facilitate the exchangeof credit information and provision of credit scores for lending purposes (Jappelli & Pagano, 2002); (3) very few

countriesin our sample introduced credit registries during our sample period. Nonetheless, we use credit registry as an alternative proxy of credit information

sharingin the final paragraph of Section 4.5.1.

2Chui et al. (2016) cite severaladvantages that cost of debt has over interest rate in estimating firms’ financing ability. For example, it helps to capture the

firm’sdealings with both public and private debtholders, hence, better reflecting the firm’s total cost of debt.