Who Needs Credit and Who Gets Credit in Eastern Europe?

38 Pages Posted: 12 Jan 2011

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Alexander A. Popov

European Central Bank (ECB)

Pinar Yein

affiliation not provided to SSRN

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Abstract

Based on survey data covering 8,387 firms in 20 countries we compare the access to bank credit for firms in Eastern Europe to that in selected Western European countries. Our analysis reveals five main results. First, the firm-level determinants of the propensity to apply are similar in Eastern and Western Europe: small and financially opaque firms as well as firms with alternative financing sources are less likely to apply for credit while firms with greater financing needs (exporters) are more likely to apply. The lower rate of loan applications by firms in Eastern Europe compared to Western Europe seems to be partly driven by the stronger presence of foreign banks and the lower level of credit information sharing. Second, while those firms which do apply for credit are rarely denied credit, foreign bank presence is associated with higher loan rejection rates among small firms. The high loan approval rates observed in Eastern and Western Europe result partly from a selection effect: those firms which are more likely to have an application rejected are less likely to apply in the first place. We find evidence that foreign bank presence is associated with higher loan rejection rates among small and government-owned firms. Third, the reasons why firms do not apply for loans differ strongly between the two regions. In Eastern Europe a higher fraction of non-applicants seem to be discouraged by lending conditions, that is, high interest rates and tough collateral requirements, while in Western Europe more firms simply do not need loans. Fourth, credit constraints in Eastern Europe softened in recent years. Firms which were discouraged from applying for credit or denied credit in 2005 were more likely to have a loan in 2008 than to still be credit constrained, especially in countries with better credit information sharing. Finally, credit constraints do affect firm performance in Eastern Europe. In particular, firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products.

Suggested Citation

Brown, Martin and Ongena, Steven R. G. and Popov, Alexander A. and Yein, Pinar, Who Needs Credit and Who Gets Credit in Eastern Europe?. Economic Policy, Vol. 26, No. 65, pp. 93-130, 2011. Available at SSRN: https://ssrn.com/abstract=1738843 or http://dx.doi.org/10.1111/j.1468-0327.2010.00259.x

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alexander A. Popov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pinar Yein

affiliation not provided to SSRN

No Address Available

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