Who needs credit & who gets credit in Eastern Europe ?

1. Who needs credit & who gets credit in Eastern Europe ? Martin Brown Swiss National Bank & Tilburg University Steven Ongena Tilburg University & CEPR Alexander Popov European Central Bank Pinar Yesin Swiss National Bank 16thDubrovnik Economic Conference

2. Disclaimer Any views expressed are only those of the authors and should not be attributed to theEuropean Central Bank, the Eurosystem, or the Swiss National Bank

3. Paper is under review at Economic Policy (CEPR) • We have currently (many) new results, but I cannot show them because of the contract with this journal • Past their Panel (Madrid), the journal doesn’t want any new article results to appear elsewhere • You will have to read the paper in Economic Policy • But I will provide a sneak preview at the end … 

4. Motivation EBRD Annual report 2008

5. Small enterprise finance promotion • EU / EBRD SME finance facility channelled 1.2 billion euro through local banks to transition countries in 2008 • World Bank / IFC spent 310 million US$ on SME finance projects in 2008

6. Research questions • Which firms are credit constrained in transition countries? • Are credit constrained firms typically denied credit or discouraged from applying for credit ? • How is credit discouragement / denial related to the structure of the banking sector and the macroeconomic environment ?

7. Contribution to the literature • Identifying credit constraints among small firms Cole, JBF 1998 Chakravarty & Xiang, 2009 • Financial sector development in Eastern Europe Giannetti & Ongena, RoF 2008 Brown, Jappelli & Pagano, JFI 2009

8. Firm-level data • World Bank & EBRD survey: BEEPS • representative survey of firms from 26 transition economies • 1999, 2002, 2004, 2005, 2008 • Data we use: • 5,040 firms from 15 Eastern European countries (BEEPS 2005) • 3,347 firms from 5 Western European countries (BEEPS 2004)

9. Share of firms with a loan (BEEPS 2004/2005)

10. Identifying credit constraints

11. Dependent variables • Credit demand: Need loan = 0 if firm did not need loan = 1 otherwise • Credit discouragement: Discouraged = 1 if needed loan and did not apply = 0 if needed loan and did apply • Credit denial: Rejected = 1 if applied and does not have loan = 0 if applied and has a loan

12. Explanatory variables • Firm-characteristics (BEEPS) • Internal financing, ownership • Exporter, industry • Size, age, financial transparency • Firm assessment of business environment (BEEPS) • Competitors • Taxation, Licensing & permits, corruption • Country-level determinants (EBRD, Doing Business, IMF) • Foreign banks, credit info, creditor rights • Inflation

13. Credit demand (Table 4)

14. Summary of the results • Similar demand for credit in Eastern & Western Europe • firms with alternative financing channels demand less • small firms demand less!

15. Credit discouragement (Table 5) excluded variable: Internal financing

16. Summary of the results • Similar demand for credit in Eastern & Western Europe • firms with alternative financing channels demand less • small firms demand less! • More credit discouragement in Eastern than Western Europe • small, financially opaque firms are especially discouraged

17. Credit denial (Table 7) excluded variables: Tax, Licencing & permits, Corruption

18. Predicted denial rates for discouraged firms (Table 8)

19. Summary of the results • Similar demand for credit in Eastern & Western Europe • firms with alternative financing channels demand less • small firms demand less • More credit discouragement in Eastern than Western Europe • small, financially opaque firms are especially discouraged • discouragement seems related to foreign bank presence • Credit denial rates are negligible in Eastern & Western Europe

20. Country determinants of credit constraints (Table 9) Eastern & Western European samples pooled

21. Summary of the results • Similar demand for credit in Eastern & Western Europe • firms with alternative financing channels demand less • small firms demand less • More credit discouragement in Eastern than Western Europe • small, financially opaque firms are especially discouraged • discouragement seems related to foreign bank presence • Credit denial rates are negligible in Eastern & Western Europe

22. Policy implications • Many (small) firms are not credit constrained • Credit discouragement may be reduced by improving information about lending conditions of (foreign) banks • Implications of the financial crisis are firm-specific • small firms • export-orientated firms

23. Sneak preview of new results • Reasons why firms do not apply for loans differ strongly • In Eastern Europe: a higher fraction of non-applicants discouraged by high interest rates and tough collateral requirements • In Western Europe: more firms simply do not need loans • Credit constraints in Eastern Europe softened in recent years • Firms which were discouraged from applying for credit or denied credit in 2005 were more likely to have a loan in 2008 than to be still be credit constrained • Credit constraints do affect firm performance in Eastern Europe • Firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products