Is Small Beautiful? Financial
Structure, Size and Access to Finance
Thorsten Beck, Asli Demirguc-Kunt
and Dorothe Singer
Motivation
 Low access to firm finance across the developing world
 Which institutions help push out the access frontier?
 Banks, specialized lenders or low-end institutions
 Different technologies and organizational structures
 Small or large institutions?
 Scale economies vs. client focus
 Is small beautiful?
Access to credit by enterprises
Access to finance – the size gap
Share of firms with deposits
0
60
40
0
20
20
percentage
40
80
60
100
Share of firms with a line of credit
Africa
Rest of the world
small(<20)
Africa
small(<20)
medium(20-99)
large(100 and over)
large(100 and over)
Sample size: 90 countries
Source: Enterprise Survey 2010
Rest of the world
Sample size: 90 countries
Source: Enterprise Survey 2010
medium(20-99)
This paper…
Combines two unique datasets to gauge
 which institutions help alleviate firms’ financing obstacles
 whether small is beautiful
 whether these relationships vary across
 countries at different levels of GDP per capita
 firms of different sizes
Who cares?
 Policy makers:
 Which segments of the financial system should be fostered
 Capital requirements, entry barriers etc. can influence size of
financial institutions
 Nigerian experience, debate in Kenya
 Academics:
 Financial structure debate limited to banks vs. markets so far
 Lending techniques for SMEs
 Relationship between bank size and access to finance
Hypotheses: Different institutions have
different advantages
 Banks
 Have larger scale to introduce new techniques, but…
 Might not be interested in catering to SMEs
 Specialized lenders (leasing, finance, factoring companies)
 Can exploit special expertise, but…
 Might have limited scale in terms of funding
 Low-end financial institutions (MFIs, credit unions, coops…)
 Specialized lending techniques and flat hierarchies might help
them approach low-end clients, but…
 Might face limitations when firms are growing
Hypothesis: Is Small Beautiful?
 Yes, it is:
 Closer to clients and can use relationship lending
 Might be forced to work with SMEs
 No, it is not:
 Larger institutions have necessary scale
 Transaction-based vs. relationship lending
Data
 Financial Sector Assessment Program (FSAP):
 data on relative importance of different segments of the
financial system that cater to low-end of market
 Data on average size of institutions in these segments
 Enterprise Surveys
 Financing obstacles
 Does a firm have an account, credit line, loan
 Overlap between two datasets: 28 countries
Financial Structure across countries
Asset Share
0
20
40
60
80
100
Low-End NBFIs, Specalized NBFIs, and Banks
Banks
Low-End NBFIs
Specialized NBFIs
Source: FSAP
Note: Assets shares do not add up to 100% as not all financial sector categories reported.
Average size across countries
Mean Assets
0
1
2
3
4
Low-End NBFIs, Specalized NBFIs, and Banks
Banks
Low-End NBFIs
Source: FSAP
Specialized NBFIs
Methodology
Financial Servicesij = a + b1 Medium Firmij + b2 Large Firmij +
b3 Subsidiaryij + b4 Public Firmij + b5 Foreign-Ownedij + b6
State-Ownedij+ b7 Firm Ageij + b8 Firm Sectorij + b9 GDP
per capitaj + b10 Financial Sector Indicatorj + eij
Ordered probit/probit regressions, with errors clustered at
country-level.
Second step: include interaction terms with (i) GDP per capita
and (ii) firm size dummies, to gauge differential effects
OLS regression (Ai and Norton, 2003)
Asset shares and access to finance
NBFI, low-end
NBFI, specialized
Banks
Access to
Finance
Account
Overdraft
Loan
oprobit
probit
probit
probit
coef/se
coef/se
coef/se
coef/se
-0.011
0.036*
0.015
0.017
(0.029)
(0.021)
(0.027)
(0.012)
-0.001
-0.020
-0.034*
-0.020
(0.017)
(0.015)
(0.018)
(0.013)
-0.004
-0.019**
-0.018***
-0.013***
(0.006)
(0.008)
(0.006)
(0.003)
Asset share and access to finance –
cross-country and cross-firm heterogeneity (1)
Access to Finance
NBFI, low-end
x GDP per capita (log)
NBFI, low-end x small
NBFI, low-end x medium
NBFI, low-end x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
0.374***
0.026**
0.101**
0.031
(0.107)
(0.011)
(0.037)
(0.024)
-0.060***
-0.003*
-0.015**
-0.004
(0.018)
(0.002)
(0.007)
(0.004)
-0.004
0.007*
0.007
0.006
(0.042)
(0.004)
(0.008)
(0.004)
-0.027
0.005**
0.001
0.005
(0.035)
(0.002)
(0.013)
(0.004)
-0.023
0.005***
0.006
0.002
(0.039)
(0.002)
(0.012)
(0.005)
Asset share and access to finance –
cross-country and cross-firm heterogeneity (2)
Access to Finance
NBFI, specialized
x GDP per capita (log)
NBFI, specialized x small
NBFI, specialized x medium
NBFI, specialized x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
-0.077
-0.004
0.091**
0.058**
(0.148)
(0.015)
(0.036)
(0.023)
0.010
0.000
-0.013***
-0.008***
(0.019)
(0.002)
(0.004)
(0.003)
-0.015
-0.006*
-0.011
-0.008
(0.022)
(0.003)
(0.007)
(0.006)
0.021
-0.002
-0.011*
-0.006
(0.022)
(0.002)
(0.006)
(0.005)
0.005
0.001
-0.014*
-0.006
(0.020)
(0.001)
(0.007)
(0.005)
Asset share and access to finance –
cross-country and cross-firm heterogeneity (3)
Access to Finance
Banks
x GDP per capita (log)
Banks x small
Banks x medium
Banks x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
0.079*
0.007
0.007
-0.015**
(0.044)
(0.010)
(0.012)
(0.005)
-0.011*
-0.001
-0.002
0.001*
(0.006)
(0.001)
(0.002)
(0.001)
-0.001
-0.003*
-0.007***
-0.006***
(0.008)
(0.002)
(0.002)
(0.001)
-0.007
-0.003*
-0.006***
-0.004***
(0.008)
(0.002)
(0.002)
(0.001)
-0.011
-0.002
-0.003
-0.003**
(0.010)
(0.002)
(0.002)
(0.001)
Asset share and access to finance –
cross-country heterogeneity – partial effects
Access to Finance
GDP per capita (log) at:
NBFI, low-end
mean
-0.070**
p25
-0.016
Account
p50
p75
-0.067**
-0.132***
0.003
-0.003
NBFI, specialized
-0.002
-0.008
-0.003
0.007
Banks
-0.003
0.003
-0.002
-0.013
mean
-0.003**
p25
0.006**
-0.003
-0.002*
Overdraft
GDP per capita (log) at:
mean
p50
p75
0.002
-0.003
-0.003
-0.003
-0.003**
-0.004*
Loan
p25
p50
p75
mean
p25
p50
p75
NBFI, low-end
-0.009
0.005
-0.008
-0.023
0.002
0.005
0.003
-0.002
NBFI, specialized
-0.007
0
-0.007
-0.018***
-0.004
0
-0.004
-0.012***
-0.005***
-0.005**
-0.007***
-0.008***
-0.005***
-0.005***
-0.005***
-0.003***
Banks
Average size and access to finance
Variable of Interest: Mean Asset Size
NBFI, low-end
NBFI, specialized
Banks
Access to
Finance
Account
Overdraft
Loan
oprobit
probit
probit
probit
coef/se
coef/se
coef/se
coef/se
-0.534***
-0.749***
0.032
-0.197**
(0.127)
(0.153)
(0.200)
(0.100)
0.913
1.082
2.868***
1.104***
(0.565)
(0.702)
(0.789)
(0.401)
-0.042
-0.028
0.158*
0.029
(0.097)
(0.082)
(0.093)
(0.054)
Average size and access to finance – crosscountry and cross-firm heterogeneity (1)
Access to Finance
NBFI, low-end
x GDP per capita (log)
NBFI, low-end x small
NBFI, low-end x medium
NBFI, low-end x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
-46.443***
4.919
18.078**
15.959**
(16.193)
(4.931)
(8.777)
(7.240)
5.418***
-0.593
-2.137**
-1.896**
(1.916)
(0.583)
(1.040)
(0.857)
-0.711***
-0.102***
0.086
0.007
(0.148)
(0.021)
(0.071)
(0.040)
-0.520***
-0.095***
-0.023
-0.075*
(0.173)
(0.015)
(0.074)
(0.039)
-0.729***
-0.082***
-0.020
-0.139***
(0.193)
(0.013)
(0.071)
(0.035)
Average size and access to finance – crosscountry and cross-firm heterogeneity (2)
Access to Finance
NBFI, specialized
x GDP per capita (log)
NBFI, specialized x small
NBFI, specialized x medium
NBFI, specialized x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
-7.878
0.783
2.732
2.497
(9.290)
(1.854)
(3.566)
(2.697)
1.097
-0.083
-0.223
-0.255
(1.187)
(0.222)
(0.427)
(0.324)
1.158
0.121
0.985***
0.487***
(0.743)
(0.105)
(0.280)
(0.161)
1.299*
0.102
0.959***
0.427**
(0.762)
(0.079)
(0.263)
(0.160)
0.801
0.068
0.576**
0.183
(0.863)
(0.076)
(0.237)
(0.128)
Average size and access to finance – crosscountry and cross-firm heterogeneity (3)
Access to Finance
Banks
x GDP per capita (log)
Banks x small
Banks x medium
Banks x large
Account
Overdraft
Loan
OLS
OLS
OLS
OLS
OLS
OLS
OLS
OLS
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
coef/se
-2.518**
0.560**
-0.406
0.152
(1.242)
(0.255)
(0.669)
(0.366)
0.294**
-0.067**
0.055
-0.017
(0.145)
(0.030)
(0.079)
(0.043)
-0.076
0.008
0.084**
0.035*
(0.123)
(0.015)
(0.035)
(0.021)
-0.020
-0.009
0.054
0.012
(0.120)
(0.011)
(0.034)
(0.020)
-0.072
-0.014
0.018
-0.018
(0.122)
(0.009)
(0.027)
(0.018)
Average size and access to finance –
cross-country heterogeneity – partial effects
Access to Finance
GDP per capita (log) at:
NBFI, low-end
NBFI, specialized
Banks
Account
mean
p25
p50
p75
mean
p25
-6.432***
-9.234***
-5.836***
-1.075***
0.538
0.847
0.288
-0.041
0.238
-0.191
0.343
1.213
0.171
0.204
0.183
0.121
-0.354*
-0.496*
-0.312
-0.056
0.064**
0.097**
0.055*
0.001
Overdraft
GDP per capita (log) at:
mean
p50
p75
Loan
p25
p50
p75
mean
p25
p50
p75
NBFI, low-end
2.285**
3.402**
2.012**
0.178*
1.953**
2.940**
1.702**
0.082
NBFI, specialized
1.078**
1.166*
1.121**
0.989***
0.612*
0.713
0.594**
0.388***
-0.001
-0.028
0.008
0.057*
0.03
0.038
0.028
0.011
Banks
Conclusions
 Bank dominance in developing countries might be
detrimental for access to firm finance
 Low-end financial institutions and specialized lenders seem
especially appropriate to ease access to finance in low-income
countries
 Larger low-end financial institutions and banks seem to ease
access to finance at low levels of GDP per capita
 Larger specialized lenders and banks are associated with a
greater likelihood of loan and overdraft use by small firms
Conclusions in two phrases
Look beyond banks
Small is not necessarily beautiful!