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Bank Credit to Small and Medium-Sized Enterprises: The Role of Creditor Protection

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  • Galindo, Arturo
  • Micco, Alejandro

Abstract

This paper develops a model showing that inefficient legal protections disproportionately increase financial restrictions for creditors that have less wealth. Due to fixed monitoring costs in equilibrium, banks will not monitor small firms, and therefore these firms will adopt risky technologies that imply a higher probability of bankruptcy. This implies that inefficiencies in the bankruptcy procedure will have a greater effect on small firms vis-à-vis large ones. Using a survey of firms in 62 countries around the world (WBES) and econometric techniques that allow us to deal with observed and unobserved country-specific components, as well as with partial endogeneity, the paper explore the role of creditor protection on small and medium-size enterprises access to bank credit. It is found that better protection of creditors reduces the financing gap between small and large firms.

Suggested Citation

  • Galindo, Arturo & Micco, Alejandro, 2005. "Bank Credit to Small and Medium-Sized Enterprises: The Role of Creditor Protection," IDB Publications (Working Papers) 1305, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:1305
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    Cited by:

    1. de la Torre, Augusto & Martínez Pería, María Soledad & Schmukler, Sergio L., 2010. "Bank involvement with SMEs: Beyond relationship lending," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2280-2293, September.
    2. Aterido, Reyes & Hallward-Driemeier, Mary & Pagés, Carmen, 2007. "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations across Firms," IDB Publications (Working Papers) 3301, Inter-American Development Bank.
    3. Madalina – Gabriela Anghel & Aurelian DIACONU & Georgiana NITA & Andreea Ioana MARINESCU, 2016. "Analysis Model of credit Risk," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(5), pages 43-48, May.
    4. Emilio Gutierrez & David Jaume & Martín Tobal, 2023. "Do Credit Supply Shocks Affect Employment in Middle-Income Countries?," American Economic Journal: Economic Policy, American Economic Association, vol. 15(4), pages 1-36, November.
    5. Carmen Pagés-Serra & Reyes Aterido & Mary Hallward-Driemeier, 2007. "Clima de negocios y creación de empleo: El efecto del acceso al crédito, la corrupción y el marco regulatorio en el crecimiento de las empresas," Research Department Publications 4560, Inter-American Development Bank, Research Department.
    6. Alali, Walid Y., 2010. "Impact of Natural Environment, Regional Integration, and Policies on FDI," EconStor Preprints 269885, ZBW - Leibniz Information Centre for Economics.
    7. Corti Paul Lakuma & Robert Marty & Fred Muhumuza, 2019. "Financial inclusion and micro, small, and medium enterprises (MSMEs) growth in Uganda," Journal of Innovation and Entrepreneurship, Springer, vol. 8(1), pages 1-20, December.
    8. Ayyagari,Meghana & Juarros,Pedro Francisco & Martinez Peria,Maria Soledad & Singh,Sandeep, 2016. "Access to finance and job growth : firm-level evidence across developing countries," Policy Research Working Paper Series 7604, The World Bank.
    9. Arturo Galindo & Alejandro Micco, 2005. "Creditor Protection and Credit Volatility," Research Department Publications 4401, Inter-American Development Bank, Research Department.
    10. Arturo Galindo & Alejandro Micco, 2005. "Protección a los acreedores e inestabilidad del crédito," Research Department Publications 4402, Inter-American Development Bank, Research Department.
    11. World Bank & International Finance Corporation, 2006. "Doing Business 2007 : How to Reform," World Bank Publications - Books, The World Bank Group, number 7245.
    12. Alali, Walid Y., 2010. "Impact of Natural Environment, Regional Integration, and Policies on FDI," MPRA Paper 115612, University Library of Munich, Germany.
    13. Tut, Daniel, 2019. "Creditor Rights, Debt Capacity and Securities Issuance: Evidence from Anti-Recharacterization Laws," MPRA Paper 102460, University Library of Munich, Germany.
    14. Makler Harry & Ness Walter L. & Tschoegl Adrian E., 2013. "Inequalities in Firms’ Access to Credit in Latin America," Global Economy Journal, De Gruyter, vol. 13(3), pages 283-318, December.
    15. Pasali, Selahattin Selsah, 2013. "Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development," Policy Research Working Paper Series 6655, The World Bank.

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    Keywords

    WP-527;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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