Who Gets the Credit? And Does It Matter? Household vs. Firm Lending across Countries

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Abstract: While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.

Figures

Figure 1: The relationship between Bank Credit to GDP and GDP per capita growth at different levels of GDP per capita

Figure 2: The relationship between Enterprise Credit to GDP and GDP per capita growth at different levels of GDP per capita

Table 2: Correlations

Full text

Tilburg University
Who Gets the Credit? And Does it Matter? Household vs Firm Lending Across
Countries
Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N.
Publication date:
2009
Link to publication in Tilburg University Research Portal
Citation for published version (APA):
Beck, T. H. L., Büyükkarabacak, B., Rioja, F., & Valev, N. (2009).
Who Gets the Credit? And Does it Matter?
Household vs Firm Lending Across Countries
. (CentER Discussion Paper; Vol. 2009-41). Finance.
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WHO GETS THE CREDIT? AND DOES
IT MATTER?
HOUSEHOLD VS. FIRM LENDING
ACROSS COUNTRIES
By Thorsten Beck, Berrak Büyükkarabacak,
Felix Rioja and Neven Valev
May 2009
European Banking Center Discussion
Paper No. 2009–12
This is also a
CentER Discussion Paper No. 2009–41
ISSN 0924-7815

Who Gets the Credit? And Does It Matter?
Household vs. Firm Lending across Countries
Thorsten Beck, Berrak Büyükkarabacak, Felix Rioja and Neven Valev
This draft: May 2009
Abstract: While theory predicts different effects of household credit and enterprise credit on the
economy, the empirical literature has mainly used aggregate measures of overall bank lending to
the private sector. We construct a new dataset from 45 developed and developing countries,
decomposing bank lending into lending to enterprises and lending to households and assess the
different effects of these two components on real sector outcomes. We find that: 1) enterprise
credit raises economic growth whereas household credit has no effect; 2) enterprise credit
reduces income inequality whereas household credit has no effect; and 3) household credit is
negatively associated with excess consumption sensitivity, while there is no relationship between
enterprise credit and excess consumption sensitivity.
JEL Codes: D14; G21; G28
Key Words: Financial Intermediation; Household Credit; Firm Credit
________________________________________________________________________
Beck (T.Beck@uvt.nl): CentER, European Banking Center,Tilburg University; Büyükkarabacak: University of
Richmond; Rioja (frioja@gsu.edu
) and Valev (nvalev@gsu.edu): Georgia State University. We would like to
thank Carlos Espina, Fernando Rios Avila and Gustavo Canavire-Bacarreza for excellent research assistance.
Useful comments from seminar participants at the joint World Bank/IMF macro seminar, the Bundesbank, the
University of Frankfurt, University of Amsterdam, University of Granada, Hong Kong University, Lingnan
University in Hong Kong, Hong Kong Institute for Monetary Research, University of Osnabrück and Oxford
University are gratefully acknowledged.

1
Who Gets the Credit? And Does It Matter?
Household vs. Firm Lending across Countries
1. Introduction
The theoretical literature linking the financial sector to the real economy makes a clear
distinction between the roles of enterprise and household credit. Most theoretical models with
endogenous financial intermediation focus on an enterprise in need of external finance for
investment or production purposes (see Levine, 2005, for an overview). These models were
motivated by the observation of financing constraints experienced by enterprises in many
developing countries (McKinnon, 1973). In contrast, most of the empirical cross-country
literature has used aggregate credit measures that combine enterprise and household credit (e.g.
Beck, Levine and Loayza, 2000; Demirguc-Kunt and Maksimovic, 1998; Rajan and Zingales,
1998).
1
However, the focus on enterprise credit in both the theoretical and the empirical finance
literature does not sit well with reality. Lending to the household sector has increased over time
and, in fact, in many countries banks lend more to households than to firms. This observation
puts into perspective the large theoretical and empirical literature that has studied the effects of
private credit from the standpoint of firm credit only.
This paper assesses whether bank lending to enterprises and bank lending to households
have independent impacts on GDP per capita growth, changes in income inequality, and the
consumption sensitivity to output variation using a newly constructed data set from 45 developed
and developing countries. In addition to building a broad disaggregated data set, our contribution
is in matching theory more closely to empirics by considering the effects of household and
enterprise lending separately. First, we assess whether measures of bank lending to enterprises
1
One exception is Büyükkarabacak and Krause (2009) who study the relationship between credit composition and
trade balance.

2
and to households enter independently in standard OLS and IV cross-country growth regressions.
Second, we explore whether enterprise credit and household credit are independently associated
with reductions in income inequality. Third, we study whether enterprise and household credit
are associated with consumption smoothing over the business cycle.
Analyzing the impact of cross-country variation in household and enterprise credit is
important for several reasons. First, understanding the consequences of credit composition can
have important repercussions for theory. If household credit has an independent impact on
growth, this has implications for how theory should model the link between financial sector
development and economic growth. Second, decomposing overall bank lending into its
components might help us understand why the effect of financial development on growth varies
across countries at different levels of economic development and provide insights into the
channels through which financial systems foster economic development. Specifically, Aghion,
Howitt, and Mayer-Foulkes (2005) and Rioja and Valev (2004 a,b) show that the effects of
financial development on growth in high-income countries are relatively smaller. Third,
understanding whether enterprise credit, household credit or both explain the negative
relationship between financial sector development and income inequality can help us understand
the channels through which this relationship works. Fourth, while theory has shown that better
access to credit by households can help them cushion income shocks, thus smoothing
consumption over the business cycle, empiricists have not assessed this hypothesis using data on
household credit at the cross-country level. Finally, finding a differential impact of enterprise
and household credit on growth, changes in income inequality and consumption smoothing can
have important implications for policy makers who are interested in maximizing the real sector
effect of financial sector policies.

Frequently asked questions

Q1. What have the authors contributed in "Who gets the credit? and does it matter? household vs. firm lending across countries" ?

In this paper, the authors investigated the relationship between household credit and enterprise credit and found that household credit is negatively associated with excess consumption sensitivity, while there is no relationship between the two components. 

Q2. What is the effect of external credit constraints on household income?

internal credit constraints, which are tied to housing values or income, are eased in good times due to higher housing prices and income levels and get more restricted during downturns (Bernanke et al., 1999; Kiyotaki and Moore, 1997). 

Q3. What is the effect of household credit on excess consumption sensitivity?

Theory points to a positive impact of household credit on relaxing liquidity constraints on households, thus resulting in lower excess sensitivity of household consumption to business cycle variations (Jappelli and Pagano, 1989; Bacchetta and Gerlach, 1997; Ludvigson, 1999). 

Q4. What is the effect of a more generous safety net?

a more generous safety net that serves as an automatic stabilizer to consumption might reduce the sensitivity of private consumption to changes in income. 

Q5. How do the authors control for reverse causation and simultaneity bias?

As in the growth regressions, the authors will also control for reverse causation and simultaneity bias by utilizing legal origin dummies and religious composition indicators as instrumental variables for enterprise and household lending. 

Q6. Why do the authors focus on bank lending to households?

due to data constraints, the authors focus on bank lending to households and ignore lending to households by non-financial institutions, an increasing phenomenon in many high- and middle-income countries. 

Q7. What is the reason why a >1 is prima facie surprising?

While a λ>1 is prima facie surprising, one possible explanation is that some countries are more likely to face internal and international credit constraints which tend to amplify shocks. 

Q8. What is the significance of the F-test of the excluded exogenous instruments?

the F-test of the excluded exogenous instruments in the first stage will indicate whether the instruments explain variation in Enterprise Credit to GDP and Household Credit to GDP and are thus relevant. 

Q9. What data are used to calculate the level and growth rate of the Gini variable?

The authors use income quintile and Gini data from Dollar and Kraay (2002) and UNU-WIDER (2006) to compute the level and growth rate of this variable. 

Q10. What can be done to help policy makers understand the impact of enterprise and household credit on growth?

finding a differential impact of enterprise and household credit on growth, changes in income inequality and consumption smoothing can have important implications for policy makers who are interested in maximizing the real sector effect of financial sector policies. 

Q11. What is the effect of enterprise credit on GDP?

As banking sectors develop, however, the share of household credit increases, as can be seen from the negative and significant correlation of Enterprise Credit Share with Bank Credit to GDP. 

Q12. What is the relationship between consumption smoothing and enterprise credit?

Enterprise credit, on the other hand, can be expected to be positively related to economic growth, while there is no theoretical argument suggesting a relationship between consumption smoothing and enterprise credit.