Is Small Beautiful? Financial Structure, Size and Access to Finance

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

MotivationLow access to firm finance across the developing worldWhich institutions help push out the access frontier?Banks, specialized lenders or low-end institutionsDifferent technologies and organizational structuresSmall or large institutions?Scale economies vs. client focusIs small beautiful?Access to credit by enterprises

Access to finance the size gap

This paperCombines two unique datasets to gaugewhich institutions help alleviate firms financing obstacleswhether small is beautifulwhether these relationships vary acrosscountries at different levels of GDP per capitafirms of different sizesWho cares?Policy makers:Which segments of the financial system should be fosteredCapital requirements, entry barriers etc. can influence size of financial institutionsNigerian experience, debate in KenyaAcademics:Financial structure debate limited to banks vs. markets so farLending techniques for SMEsRelationship between bank size and access to financeHypotheses: Different institutions have different advantagesBanksHave larger scale to introduce new techniques, butMight not be interested in catering to SMEsSpecialized lenders (leasing, finance, factoring companies)Can exploit special expertise, butMight have limited scale in terms of fundingLow-end financial institutions (MFIs, credit unions, coops)Specialized lending techniques and flat hierarchies might help them approach low-end clients, butMight face limitations when firms are growingHypothesis: Is Small Beautiful?Yes, it is:Closer to clients and can use relationship lendingMight be forced to work with SMEsNo, it is not:Larger institutions have necessary scaleTransaction-based vs. relationship lendingDataFinancial Sector Assessment Program (FSAP): data on relative importance of different segments of the financial system that cater to low-end of marketData on average size of institutions in these segmentsEnterprise SurveysFinancing obstaclesDoes a firm have an account, credit line, loanOverlap between two datasets: 28 countries

Financial Structure across countries

Average size across countries

MethodologyFinancial Servicesij = a + b1 Medium Firmij + b2 Large Firmij + b3 Subsidiaryij + b4 Public Firmij + b5 Foreign-Ownedij + b6 State-Ownedij+ b7 Firm Ageij + b8 Firm Sectorij + b9 GDP per capitaj + b10 Financial Sector Indicatorj + eij

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 effectsOLS 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

ConclusionsBank dominance in developing countries might be detrimental for access to firm financeLow-end financial institutions and specialized lenders seem especially appropriate to ease access to finance in low-income countriesLarger low-end financial institutions and banks seem to ease access to finance at low levels of GDP per capitaLarger specialized lenders and banks are associated with a greater likelihood of loan and overdraft use by small firmsConclusions in two phrasesLook beyond banksSmall is not necessarily beautiful!