The Impact of Credit Information Sharing on Interest Rates

I study the impact of information sharing among banks on the interest rates that borrowers pay. To identify the effect of credit information sharing, I explore a particular feature of the introduction of an information-sharing system in an African banking market. Banks started to refer borrowers to the new system more than a year before they began to actively use the data to screen applicants. Therefore, this study is the first to directly control for changes in the composition of the borrower pool by combining a control period during which no information was shared among banks with a loan-level data source that makes it easier to trace borrowers who switch banks. The results greatly support the idea that information-sharing efficiently mitigates against adverse selection problems. Successful repeat borrowers are able to obtain cheaper follow-up loans when information is actively shared among banks and borrowers who switch institutions and benefit most from the reduction in adverse selection. At the same time, as banks lose their ability to hold up successful borrowers for their second loan getting credit for the first time starts to become more expensive, even though this effect is strongly outweighed by the cost reduction for follow-up loans.