Credit markets have always been imperfect, with significant transaction and information costs hindering the allocation of funds. In economies without financial intermediaries, lenders had to allocate resources to search for and screen potential borrowers and monitor the use of funds, while borrowers had to seek out lenders. Overtime, financial intermediaries emerged to economize on these costs. Notaries, for instance, were crucial intermediaries, holding valuable information on potential lenders and borrowers. Eventually, banks were created, helping savers and investors mitigate transaction and information costs, thereby facilitating credit allocation, and fostering economic growth.
In Latin America, credit markets have operated since viceregal times. Prior to the creation of banks, private lenders dealt with transaction and information costs, and extended credit to a variety of borrowers, sometimes with the intermediation of notaries. Some private lenders were merchants and traders, others were proprietors; some were lawyers, others were government employees; some were men, others were women. In Mexico, merchants and traders provided credit, and even received deposits all over the territory. In Brazil, private lenders also provided credit in urban and rural areas. In Peru, private lenders provided credit to families and firms both before and after the creation of banks. In other countries, private lenders also made loans to a variety of borrowers.
Private lenders were not all the same; some engaged more actively in the credit market than others. Frequent lenders likely held some competitive advantages over occasional lenders. One key advantage for frequent lenders stemmed from their extensive experience in the credit market, leading to enhanced information on potential borrowers. While notaries held valuable information about potential borrowers, lenders still faced information constraints. However, frequent lenders could reduce costs for searching and screening new borrowers through economies of scale, making information asymmetries less significant for them than for occasional lenders. Additionally, frequent lenders could mitigate risk by diversifying their loans across different economic sectors, a strategy unavailable to their occasional counterparts.
Several economists have argued that financial markets can foster economic growth through mechanisms such as economizing on information costs and facilitating risk diversification. For instance, by economizing on information costs, financial markets may facilitate learning about investment opportunities, thereby improving resource allocation and increasing economic growth. In addition, financial markets that ease risk diversification may encourage a portfolio shift toward projects with higher expected returns, thereby fostering economic growth. If frequent lenders economized on information costs and diversified risk, they would have contributed to capital mobilization, technological change and economic growth.
Nineteenth-century Lima presents a noteworthy case for studying the role of frequent lenders in early credit markets. During the Guano Era, some residents of Lima (limeños) accumulated large amounts of capital. They could have contributed to the mobilization of capital by lending to a variety of borrowers. Did wealthy lenders help mobilize capital, or did they only fund the investments of the richest borrowers? By operating on a larger scale than occasional lenders, frequent lenders could experience gains in efficiency. Did frequent lenders diversify risk to a greater extent than occasional lenders? Did frequent lenders know potential borrowers better than occasional lenders, thereby facing lower information asymmetries?
This article examines the role of frequent lenders in the credit market of Lima between 1840 and 1865, using information from a sample of notarized loans. The evidence shows that frequent lenders were wealthy individuals. Frequent lenders had enough resources to make loans to large borrowers; however, they did not only lend to the wealthiest borrowers. Some of their loans went to rich individuals, but frequent lenders also served the needs of middle- and low-income borrowers. In fact, the proportion of loans allocated to medium and small borrowers was similar for both frequent and occasional lenders.
Two possible advantages of frequent lenders were that they had better opportunities to diversify risk, and could deal with information asymmetries at lower costs than occasional lenders. The evidence shows that frequent lenders diversified risk to a greater extent than occasional lenders, by making loans to borrowers from different sectors. In addition, consistent with the hypothesis that frequent lenders knew borrowers better than other lenders, frequent lenders engaged in repeated lending less regularly than occasional lenders.
Referencia
Zegarra LF. Frequent lenders and the credit market of Lima. An analysis of notarized loans. Revista de Historia Económica / Journal of Iberian and Latin American Economic History. Published online 2026:1-25. doi:10.1017/S0212610926101013
