Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers
38 Pages Posted: 3 Oct 2001
Date Written: September 2001
How does entry by foreign banks affect lending to small and medium-size enterprises in developing countries? Analysis of data from a large cross-country survey of enterprises finds that foreign bank entry benefits firms of all sizes, although it seems to benefit larger firms more.
Existing evidence on the effect of foreign bank penetration on lending to small and medium-size enterprises is ambiguous. Case studies of developing countries show that foreign banks lend less to such firms than domestic banks do. But cross-country studies find that foreign bank entry fosters competition and reduces interest rates, benefits that should extend to all firms.
Clarke, Cull, and Martinez Peria use data from a large cross-country survey of enterprises to investigate this issue. Their results suggest that foreign bank penetration improves financing conditions (both the quantities of financing and the terms) for enterprises of all sizes, although it seems to benefit larger firms more.
This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the impact of entry by foreign banks on domestic banking systems in developing countries. The authors may be contacted at email@example.com, firstname.lastname@example.org, or email@example.com.
JEL Classification: G21, G32
Suggested Citation: Suggested Citation