What Determines SME Financial Inclusion in Emerging Economies? Deriving Policy Implications Using a Logistic Regression Approach

Small and Medium Enterprises continue to be the backbone of emerging economies given the large-scale concentration of output and employment in this sector. A necessary condition for their development is the availability of adequate financial resources. Finance remains the foremost constraint for these firms particularly in emerging economies given their underdeveloped credit markets and higher substitutability with informal sources of finance. Policymakers in emerging economies need to grasp the factors affecting SME financial inclusion as credit markets are generally incapable of fulfilling this objective without policy interventions. This paper engages in a study of how the Governments in Brazil, Russia, India and China (BRIC) can prudently push financial inclusion among SMEs by using granular data on more than 10,000 firms. The issue is examined via the firm-characteristics model to study the determinants of SME financial inclusion in BRIC. This study deploys a multiple logistic regression model specified within a discrete response framework. Firm characteristics that affect the demand for finance—which are largely endogenous to the SMEs and the supply of finance—that are largely exogenous to the SMEs are incorporated into the structure of the model. Results indicate that supply-side considerations have played a prominent role in shaping the likelihood of SMEs accessing finance. The study also finds that the optimal financial inclusion strategy would be to prioritize policy-endogenous determinants of SME financial inclusion rather than putting resources into the policy-exogenous forces.