Banking sector competition and firms’ financial constraints: Firm-Level evidence from developing economies

Habib Hussain Khan and Ali Kutan

Journal of International Financial Markets, Institutions and Money, 2023, vol. 88, issue C

Abstract: We explore the link between bank competition and financing constraints of small and medium-sized enterprises (SMEs) for a sample of 48 developing economies. We incorporate several firm-specific characteristics such as size, age, tangibility, profitability, growth potential, innovativeness, industry, internationalization, and ownership structure. In addition, we con-sider the role of financial development, credit information availability, credit cycle, business cycle, and macroprudential policies. We calculate the credit-constrained status of SMEs using information from the World Bank’s Enterprise Survey (WBES). The findings suggest that the likelihood of a business being credit-constrained is smaller in a competitive banking environment. We get consistent results when employing various indicators of credit constraints and banking competition. The availability of credit information reduces the information asymmetry and lowers the discouraging role of banking market power. Furthermore, banking sector development supports the competition in decreasing SMEs’ financing obstacles. In addition, economies with more financial freedom, effective enforcement of legal rights, and institutional quality support businesses in gaining more access to external financing. Policy implications of the findings are discussed.

Keywords: Financial Constraints; Concentration; Competition; Developing Countries; SMEs (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:88:y:2023:i:c:s1042443123001166

DOI: 10.1016/j.intfin.2023.101848

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