Bank Competition and Access to Finance: International Evidence

By Beck, Thorsten; Demirguc-Kunt, Asli et al. | Journal of Money, Credit & Banking, June 2004 | Go to article overview

Bank Competition and Access to Finance: International Evidence


Beck, Thorsten, Demirguc-Kunt, Asli, Maksimovic, Vojislav, Journal of Money, Credit & Banking


WHILE THE RECENT empirical literature provides empirical evidence on the positive role of the banking sector in enhancing economic growth through more efficient resource allocation, less emphasis has been put on the structure of the banking system. (1) Theory makes conflicting predictions about the relation between bank market structure and the access to and cost of credit. While general economic theory points to inefficiencies of market power, resulting in less loans supplied at a higher interest rate, information asymmetries and agency problems might result in a positive or nonlinear relation between the market power of intermediaries and the amount of loans supplied to opaque borrowers in a dynamic setting. Similarly, empirical studies have derived conflicting results; most of these studies, however, focus on a specific country, mostly the U.S.

This paper explores the impact of bank competition on firms' access to credit for a cross-section of 74 developed and developing countries. Specifically, we use survey data on the financing obstacles perceived by firms and relate these data to the competitive environment in the country's banking market. We use both the market share of the largest three banks and regulatory policies that influence the competitive framework in which banks operate, such as share of bank license applications rejected and restrictions on banks' activities. We control for the ownership structure and the institutional environment. We assess the impact of the market structure on firms of different sizes, while at the same time controlling for a large number of other firm characteristics.

Our results indicate that in more concentrated banking markets, firms of all sizes face higher financing obstacles. This effect decreases as we move from small to medium and large firms. Further, there seems to be an important interaction between bank concentration, on the one side, and regulatory and institutional country characteristics and the ownership structure of the banking system, on the other side. The relation of bank concentration and financing obstacles turns insignificant in countries with high levels of GDP per capita, well-developed institutions, an efficient credit registry, and a high share of foreign banks. Public bank ownership, a high degree of government interference in the banking system, and restrictions on banks' activities, on the other hand, exacerbate the impact of bank concentration on financing obstacles.

Our results provide evidence for theories that focus on the negative effects of bank market power on access to credit, especially for developing countries. For the most part, the results are not consistent with theories that predict a positive impact of bank concentration on alleviating financing obstacles for small firms and allowing them access to credit. Our findings underline the importance of taking into account the institutional and regulatory framework when assessing the impact of bank concentration on firm's financing obstacles, thus broadening the focus to the competitive and regulatory environment in which banks operate. They also stress the importance of regulations, institutions, and ownership structure for policy makers who are interested in alleviating financing obstacles. For example, removing activity restrictions in a concentrated banking system alleviates the negative impact of bank concentration on access to finance.

This paper makes several contributions to the literature. First, while most empirical papers assessing the effect of bank concentration focus on a specific country, mostly the U.S., this paper uses cross-country analysis, including developed, developing, and transition economies. Given the specific regulatory and institutional development of the U.S., a cross-country approach is important for drawing conclusions for policy makers in developing countries.

Second, to our knowledge this is the first paper using firm-level data to evaluate the effect of market structure on firms' financing obstacles across a broad cross-section of countries and firms of different sizes. …

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