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Who needs credit and who gets credit in Eastern Europe?

  • Martin Brown
  • Steven Ongena
  • Alexander Popov
  • Pinar Yeşin

Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that, while 30% of firms do not need credit in Eastern Europe, their need for credit is higher than in Western Europe. The firm-level determinants of credit needs in Eastern Europe are quite similar to that in Western Europe: Firms with alternative financings sources, i.e. government-owned, foreign-owned and internally financed firms, are less likely to need credit. Small firms are also less likely to demand credit than larger firms, suggesting that they may have limited investment opportunities. We find that a higher share of firms is discouraged from applying for a loan in Eastern Europe than in Western Europe. Firms in Eastern Europe seem particularly discouraged by high interest rates compared to firms in Western Europe, with collateral conditions and loan application procedures also more discouraging. The higher rate of discouraged firms in Eastern Europe is related to a stronger reluctance of small and financially opaque firms to apply for a loan compared to Western Europe. While many discouraged firms correctly anticipate that their loan applications would be rejected, a large majority of discouraged firms seem to be creditworthy. At the country-level we find that the higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Our findings suggest to policy makers that the low incidence of bank credit among firms in Eastern Europe, compared to Western Europe, is not driven by less need for credit or banks' reluctance to extend loans. The main driver seems to be that many (creditworthy) firms are discouraged from applying for a loan, due to high interest rates, collate

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Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 26 (2011)
Issue (Month): 65 (January)
Pages: 93-130

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Handle: RePEc:bla:ecpoli:v:26:y:2011:i:65:p:93-130
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