An analysis of SMEs funding, bank efficiency and barriers to lending: three essays

Abstract

This thesis focuses on bank lending to SMEs with consideration of both the demand side and supply side. To this end, three distinctive lines of research are pursued in this thesis. We start with analyzing results from a regional survey of 20 banks and 180 SMEs conducted in 2012 in North Vietnam for new insights into the determinants of successful access to bank loans by SMEs. Secondly, we examine factors of the business environment that affect SME growth using original datasets obtained from surveys conducted in both Vietnam and the UK in 2012. Finally, we extend our research to the supply side with an important question about how banks in East Asia performed throughout the 2007-2008 global financial crisis. Following this, we analyze the impact of liberalization on banking soundness based on a secondary dataset of 10 East Asian countries (1997-2012).
Using different econometric approaches and different samples, we present robust evidence that factors from the business environment drive SMEs’ loan access and their growth. On the demand side, financing is still the foremost determinant for SME growth. Furthermore, the industrial sector where firms operate has an influence on access to finance as well as growth. From the supply side, various sizes and ownership forms differently impact SME lending. In addition, a rise in comparative size (systemic size) significantly reduces bank risk. However, a growth in absolute size (total assets) is associated with greater bank vulnerability due to increasing leverage ratios and costs. Banks tend to favour SMEs who have a close relationship or have collateral to pledge. Importantly, institutional setting has a significant impact on behaviours of SMEs and banks. While larger SMEs have better regulatory perceptions, banks of different sizes and ownership structures, have very different perceptions about legal uncertainties and therefore produce various lending requirements which directly affect the availability and affordability of SME lending.
The empirical results give rise to policy implications for transition (and possibly other) countries. Firstly, the robustly positive nexuses between the numbers of relationships with banks and loan access suggest that stimulating competition in the banking sector can help firms mitigate stringent terms and conditions for credit approvals. However, greater absolute market power (market share) reduces soundness in the banking sector while greater comparative market power (HHI) fosters it. Secondly, the fact that legal uncertainties go hand in hand with a high ratio of collateralized loans with any bank size emphasises the need for improving regulations on collateral and creditor- rights. Thirdly, given that the adoption of Basel capital standards is viewed as creating advantages for larger banks over smaller banks, and my results show liberalisation to also favour larger banks, suggests a distortion in financial markets and may produce further instabilities. My results may provide insights for policy makers when considering which areas of banking and finance they should or should not deregulate with a motivation to stimulate competition and enhance stability. Finally, this thesis reveals insights into sectors facing barriers to finance and growth, and therefore provides valuable information for policymakers in setting incentives targeted at and tailored to specific groups of SMEs.

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ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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