The Impact of Credit Information Sharing on Interest Rates

I study the impact of information sharing among banks on interest rates borrowers pay. To identify the effect of credit information sharing, I exploit a particular feature of the introduction of an Information sharing system in an African banking market. Banks started to Report borrowers to the new system more than a year before they began to actively use the data to screen applicants. Hence, this study is the first to directly control for compositional changes in the borrower pool by combining a control period during which no information was shared among banks with a loan-level data source that facilitates tracing borrowers who switch banks. Results lend great support to the idea that information sharing efficiently mitigates adverse selection problems. Successful repeated borrowers are able to obtain cheaper follow-up loans when information is actively shared among banks and borrowers who Switch institutions profit most from the reduction in adverse selection. At the same time, as banks loose their ability to hold-up successful borrowers for their second loan, first-time credit starts to be more expensive, even though this effect is strongly outweighed by the cost reduction for follow-up loans.