SME Credit Availability Around the World: Evidence from the World Bank's Enterprise Surveys
47 Pages Posted: 22 Apr 2012 Last revised: 25 Aug 2018
Date Written: December 31, 2017
In this study, we use data from the World Bank’s Enterprise Surveys of 133 countries over the period from 2006 – 2014 to test the importance of governance to the availability of credit. We model the credit-allocation process for SMEs into a sequence of three steps. Based upon these three steps, we classify small businesses into four groups based upon their credit needs. In a first step, we analyze which firms do, and do not, need credit. The No-Need firms have received scant attention in the literature even though they typically account for more than half of all small firms. We find that a No-Need firm is more likely to be owned by a foreigner; and is more likely to be classified as a manufacturing or chemicals company, and that firms located in developing, but not developed, countries with better governance are less likely to need credit. In a second step, we analyze Discouraged firms—those which reported a need for credit but failed to apply because they feared being turned down or thought that interest rates and collateral requirements were too unfavorable. Like No-Need firms, Discouraged firms have received scant attention in the literature. Discouraged firms typically outnumber firms that apply for and are denied credit. Among firms that need credit, we find that a Discouraged firm is both younger and smaller; is much less likely to be organized as a corporation; and is less likely to run by an experienced management team. We also find that firms located in countries with better governance are less likely to report that they are Discouraged, both in developed and in developing countries. In our third step, we analyze firms that applied for credit and either were turned down (Denied firms) or were extended credit (Approved firms). Among firms that apply for credit, we find that a Denied firm is both younger and smaller; is less likely to be organized as a corporation; and is less likely to be run by more experienced management team. We also find that firms located in countries with better governance are less likely to report that they were Denied credit, both in developed and in developing countries. From this evidence, we conclude that country-level governance plays a critical role in the availability of credit to SMEs in both developed and developing countries.
Keywords: availability of credit, denied credit, discrimination, discouraged firm, entrepreneurship, small business, WBES
JEL Classification: G21, G32, J71, L11, M13
Suggested Citation: Suggested Citation