Thorsten Beck, Asli Demirguc-Kunt and Dorothe Singer Is Small Beautiful? Financial Structure, Size and Access to Finance

Motivation Low access to firm finance across the developing world Which institutions help push out the access frontier? Banks, specialized lenders or low-end institutions Different technologies and organizational structures Small or large institutions? Scale economies vs. client focus Is small beautiful?

Access to credit by enterprises

Access to finance – the size gap

This paper… Combines two unique datasets to gauge which institutions help alleviate firms’ financing obstacles whether small is beautiful whether these relationships vary across countries at different levels of GDP per capita firms of different sizes

Who cares? Policy makers: Which segments of the financial system should be fostered Capital requirements, entry barriers etc. can influence size of financial institutions Nigerian experience, debate in Kenya Academics: Financial structure debate limited to banks vs. markets so far Lending techniques for SMEs Relationship between bank size and access to finance

Hypotheses: Different institutions have different advantages Banks Have larger scale to introduce new techniques, but… Might not be interested in catering to SMEs Specialized lenders (leasing, finance, factoring companies) Can exploit special expertise, but… Might have limited scale in terms of funding Low-end financial institutions (MFIs, credit unions, coops…) Specialized lending techniques and flat hierarchies might help them approach low-end clients, but… Might face limitations when firms are growing

Hypothesis: Is Small Beautiful? Yes, it is: Closer to clients and can use relationship lending Might be forced to work with SMEs No, it is not: Larger institutions have necessary scale Transaction-based vs. relationship lending

Data Financial Sector Assessment Program (FSAP): data on relative importance of different segments of the financial system that cater to low-end of market Data on average size of institutions in these segments Enterprise Surveys Financing obstacles Does a firm have an account, credit line, loan Overlap between two datasets: 28 countries

Financial Structure across countries

Average size across countries

Methodology Financial Services ij = a + b 1 Medium Firm ij + b 2 Large Firm ij + b 3 Subsidiary ij + b 4 Public Firm ij + b 5 Foreign-Owned ij + b 6 State-Owned ij + b 7 Firm Age ij + b 8 Firm Sector ij + b 9 GDP per capita j + b 10 Financial Sector Indicator j + e ij Ordered probit/probit regressions, with errors clustered at country-level. Second step: include interaction terms with (i) GDP per capita and (ii) firm size dummies, to gauge differential effects OLS regression (Ai and Norton, 2003)

Asset shares and access to finance

Asset share and access to finance – cross-country and cross-firm heterogeneity (1)

Asset share and access to finance – cross-country and cross-firm heterogeneity (2)

Asset share and access to finance – cross-country and cross-firm heterogeneity (3)

Asset share and access to finance – cross-country heterogeneity – partial effects

Average size and access to finance

Average size and access to finance – cross- country and cross-firm heterogeneity (1)

Average size and access to finance – cross- country and cross-firm heterogeneity (2)

Average size and access to finance – cross- country and cross-firm heterogeneity (3)

Average size and access to finance – cross-country heterogeneity – partial effects

Conclusions Bank dominance in developing countries might be detrimental for access to firm finance Low-end financial institutions and specialized lenders seem especially appropriate to ease access to finance in low-income countries Larger low-end financial institutions and banks seem to ease access to finance at low levels of GDP per capita Larger specialized lenders and banks are associated with a greater likelihood of loan and overdraft use by small firms

Conclusions in two phrases Look beyond banks Small is not necessarily beautiful!