Bank Financing for SMEs: Evidence Across Countries and Bank Ownership Types

Published: 2019-06-26 14:52:44
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AbstractThis paper is based on a finance journal, (2010) Bank Financing for SMEs: Across Countries and Bank Ownership Types, authored by B. Thorsten and D. Asli. The journal is based on data for 91 large banks emerging form 45 countries. Banks are preferred in this journals study to other financial institutions, because Beck, Demirguc-Kunt & Martinez Peria, (2008) study found out that banks are the primary source of external finances for SMEs globally. Various banks ranging from MNCs, foreign, domestic offering, privately held and government-owned offer credit services to SMEs in both developed and developing economies, have different organisational structure and different lending technologies which includes factoring lending, asset based lending, fixed assets lending and credit scoring alongside other credit technologies. Typically banks with a traditional management structure are reluctant to extent credit facilities to opaque SMEs, since those banks used the convectional credit creation technologies based on collateral of regular cash flows backed by sufficient shareholders leverage, which is exceptionally not the case for most SMEs (Minetti & Peng, 2013). The Journal hypothesized, the correlation between bank ownership against the credit creation technology preference, as well as the relationship between the management structure and the preferred arm-length credit creation technology

Conclusion

This study has a sufficient empirical support sourced widely from forty five countries, 38 developing economies and the rest 7 are developed countries. The Survey data was data from 91 banks, of which 11 banks are based in developed nations while the rest 80 emerge operates in developing economies. Banks are the basic financier for SMEs, therefore commercial banks are a relevant variable to this study. Hypothesises are well designed and empirically valid per se. primarily, most Banks defined SMEs in relations to annual sales of $200,000 to $4000000

Correlation of bank ownership and the preferred credits arm-length technology.

Generally Foreign and Government-owned banks practice decentralised loan approval and risk management operations to the branches, especially related to SMEs lending. Study in this journal shows that real interest rates with such decentralised banks, are lower compared to centralised operations banks.

Foreign Banks v. Domestic Banks

Conventionally, there is no existing correlation for government owned banks to lending technology that is known. Findings indicate that foreign banks are less in the offing to rate lax information as highly significant. Foreign banks obviously practising a decentralised organisational structure, share of collateralized lending is notably higher than of domestic counterparts. Conclusively, foreign banks compared to domestic counterparts are likely to adopt varied arm-length credit technologies with a decentralised management style (Berger, Hasan & Klapper, 2003).

Private-held banks v. Government-Owned banks

Government-owned banks are more likely to decentralise credit and risk mandate involving SMEs to the branches compared to the privately owned banks. However they have a positively strong regression relationship to traditional lending technology of collateral and heavy reliance to hard information.

Privately held banks, mostly have centralised management structure, whereby the credit and risk management approval authority is at the apexes. The study showed significantly high reliance on soft information by Privately-owned banks in the Credit processing to SMEs.

Bank ownership type v. SME lending share

Study showed that foreign banks shy away from SME financing, since they adopt arm-length credit technologies such as asset based lending, fixed assets lending and credit scoring alongside other credit technologies on a decentralized management structure (Minetti & Peng, 2013). According to Beck & Cull, (2005), study showed that government owned banks, tends to skew away from SMEs and lend primarily to notably large forms, to undertake political objects. However, exceptionally in this study, developed economies show that a significant percentage of government owned banks are indifferent, in relation to credit operations, thus showing no particular skewedness to SMEs or large corporations.

Financing Difference in Developed and Developing Economies

Findings show that the loan charges are high in developed countries for banks that have principally invested in secured lending. These are mainly the large banks that are in the phase of massive diseconomies of scale hence, have trouble in integrating the variety of recent alternative credit technologies into their systems. Therefore with their significant industry influence derived from large asset base and market share, shy away from SME lending, rather lend to established large entities.

In both classes of economies, foreign-owned banks tend to show notable difference from the domestic-host country banks. In developed countries, the share of banks investment devoted to SME lending is notably higher by 25%-32%, compared to developing economies.

The front end costs of credit products offered to SMEs in developing countries is higher by 0.7%-08% compared to credit front end costs in developed countries. However, there is no strongly evidenced and clear relationship between the types of the economy size to a particular arm-length credit technology in relation to SMEs financing.

The study shows a clear link between the size of the economy and reliance of soft and hard information. Generally, in developed nations, banks are more likely to permit use of soft information to approval a loan offer in relation to SMEs, compared to the counterpart economy.

References

Beck, T., & Cull, R. (2005). Bank privatization and performance. Washington, D.C.: World Bank, Development Research Group, Finance Team.

Beck, T., DemirguIcI-Kunt, A., & Martinez Peria, M. (2008). Bank financing for SMEs around the world. Washington, D.C.: World Bank.

Berger, A., Hasan, I., & Klapper, L. (2003). Further evidence on the link between finance and growth: an international analysis of community banking and economic performance. Washington, DC: World Bank, Development Research Group.

Minetti, R., & Peng, T. (2013). Lending constraints, real estate prices and business cycles in emerging economies. Journal Of Economic Dynamics And Control, 37(12), 2397-2416. http://dx.doi.org/10.1016/j.jedc.2013.07.007

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