This paper presents recent research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs’ contribution to growth. Financial and institutional development helps alleviate SMEs’ growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure.

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Small and medium-size enterprises: Access to finance as a growth constraint

We propose a more complete conceptual framework for analysis of SME credit availability issues. In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. We emphasize a causal chain from policy to financial structures, which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies plus relationship lending. We argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.

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A more complete conceptual framework for SME finance

Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional "competition-fragility" view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the "competition-stability" view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.

https://papers.ssrn.com/sol3/Delivery.cfm/4696.pdf?abstractid=1243102

Bank Competition and Financial Stability

Financial inclusion -- defined here as the use of formal accounts -- can bring many welfare benefits to individuals. Yet the authors know very little about the factors underpinning financial inclusion across individuals and countries. Using data for 123 countries and over 124,000 individuals, this paper tries to understand the individual and country characteristicsassociated with the use of formal accounts and what policies are effective among those most likely to be excluded: the poor and rural residents. The authors find that greater ownership and use of accounts is associated with a better enabling environment for accessing financial services, such as lower account costs and greater proximity to financial intermediaries. Policies targeted to promote inclusion -- such as requiring banks to offer basic or low-fee accounts, exempting some depositors from onerous documentation requirements, allowing correspondent banking, and using bank accounts to make government payments -- may be especially effective among those most likely to be excluded. Finally, the study the factors associated with perceived barriers to account ownership among those who are financially excluded and find that these individuals report lower barriers in countries with lower costs of accounts and greater penetration of financial service providers. Overall, the results suggest that policies to reduce barriers to financial inclusion may expand the pool of eligible account users and encourage existing account holders to use their accounts with greater frequency and for the purpose of saving.

The Foundations of Financial Inclusion: Understanding Ownership and Use of Formal Accounts

Does limited access to formal savings services impede business growth in poor countries? To shed light on this question, we randomized access to noninterest-bearing bank accounts among two types of self-employed individuals in rural Kenya: market vendors (who are mostly women) and men working as bicycle taxi drivers. Despite large withdrawal fees, a substantial share of market women used the accounts, were able to save more, and increased their productive investment and private expenditures. We see no impact for bicycletaxi drivers. These results imply significant barriers to savings and investment for market women in our study context. (JEL D14, G21, J16, J23, O12, O14, O16)

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Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya

The authors combine firm-level data from the World Bank Business Environment Survey (WBES) with data on private and public credit registries to investigate whether the presence of a credit registry in a country is associated with lower financing constraints, as perceived by managers, and with higher share of bank financing. They find that the existence of private credit registries is associated with lower financing constraints and higher share of bank financing, while the existence of public credit registries does not seem to have a significant effect on these perceived financing constraints. The authors also find that small- and medium-sized firms tend to have a higher share of bank financing in countries where private registries exist and stronger rule of law is associated with more effective private credit registries. Finally, the authors find some evidence that the presence of a public credit registry benefits younger firms relatively more than older firms.

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Credit reporting and financing constraints

This paper introduces a new set of financial access indicators for 139 countries across the globe and describes the results of a preliminary analysis of this data set. The new data set builds on previous work using a similar methodology. The new data set features broader country coverage and greater disaggregation by type of financial product and by type of institution supplying the product -- commercial banks, specialized state run savings and development banks, banks with mutual ownership structure (such as cooperatives), and microfinance institutions. The authors use the data set to conduct a rough estimation of the number of bank accounts in the world (6.2 billion) as well as the number of banked and unbanked individuals. In developed countries, they estimate 3.2 accounts per adult and 81 percent of adults banked. By contrast, in developing countries, they estimate only 0.9 accounts per adult and 28 percent banked. In regression analysis, they find that measures of development and physical infrastructure are positively associated with the indicators of deposit account, loan, and branch penetration.

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Measuring Financial Access around the World

Recent empirical evidence highlights that access to basic financial services can make a substantial positive difference in improving poor people's lives. Accordingly, financial sector reforms that promote financial inclusion are increasingly at the core of policymakers agendas. The Consultative Group to Assist the Poor and the World Bank Group, in response, launched the Financial Access project, including a cross-country database on financial inclusion topics and an annual report to inform the policy debate. Using this database, this paper (i) counts the number of unbanked adults around the world at 56 percent, (ii) analyzes the state of access to deposit and loan services as well as the extent of retail networks, and (iii) discusses the state of financial inclusion mandates around the world.

Access to Financial Services and the Financial Inclusion Agenda around the World : A Cross-Country Analysis with a New Data Set

In the aftermath of the global financial crisis of 2008-2009, there has been an increased interest in the role of small and medium enterprises in job creation and economic growth. However the lack of consistent indicators at the country level restricts extensive cross-country analyses of lending to small and medium enterprises. This paper introduces a new dataset to fill this gap in the small and medium enterprise data landscape. In addition, it provides the first set of results of analyses with this new dataset, predicting the global small and medium enterprise lending volume to be $10 trillion. The bulk of this volume, 70 percent, is in high-income countries. On average, small and medium enterprise loans constitute 13 percent of gross domestic product in developed countries and 3 percent in developing countries. Note that although a unique small and medium enterprise definition does not exist, differences in definitions across countries are not statistically significant in explaining the differences in small and medium enterprise lending volumes.

/pdf/small-and-medium-enterprises-a-cross-country-analysis-with-a-f1p8hhzks4.pdf

Small and medium enterprises : a cross-country analysis with a new data set

The authors analyze how data in public credit registries can be used both to strengthen bank supervision and to improve the quality of credit analysis by financial institutions. Empirical tests using public credit registry (PCR) data were performed in collaboration with the central banks in Argentina, Brazil, and Mexico. The results of the empirical tests confirm the value of the data for credit risk evaluation and provide insights regarding its use in supervision, including in calculations of credit risk for capital and provisioning requirements, or as a check on a bank's internal ratings for the Basel II's internal rating-based approach. The authors also define a set of critical design parameters and use the results to comment on appropriate public registry design. Finally, they discuss the relationship between the different objectives of a PCR and how they influence the registry's design.

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Nataliya Mylenko

Papers

Credit reporting and financing constraints

Measuring Financial Access around the World

Access to Financial Services and the Financial Inclusion Agenda around the World : A Cross-Country Analysis with a New Data Set

Small and medium enterprises : a cross-country analysis with a new data set

Improving Credit Information, Bank Regulation and Supervision: On the Role and Design of Public Credit Registries