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
16th Dubrovnik Economic Conference
Disclaimer
Any views expressed are only those of the authors and
should not be attributed to
the European Central Bank, the Eurosystem,
or the Swiss National Bank
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 … 
Motivation
EBRD Annual report 2008
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
Research questions
1. Which firms are credit constrained in transition countries?
2. Are credit constrained firms typically denied credit or
discouraged from applying for credit ?
3. How is credit discouragement / denial related to the structure
of the banking sector and the macroeconomic environment ?
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
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)
Croatia
Slovenia
Bosnia
Hungary
Latvia
Slovak Rep
Lithuania
Romania
Estonia
Albania
Serbia
Bulgaria
Poland
Czech Rep
Macedonia
Western Europe
Eastern Europe
Portugal
Greece
Spain
Ireland
Germany
Share of firms with a loan (BEEPS 2004/2005)
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Identifying credit constraints
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
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
Credit demand (Table 4)
Small Firm
Age
Owner foreign
Exporter
Audited
Internal finance
Method
Eastern Europe
-0.043**
0.019*
-0.122***
0.064**
0.019
-0.003***
Probit
Western Europe
-0.110***
0.032**
-0.212***
0.044
-0.028
-0.005***
Probit
E vs. W
**
Pseudo R2
Country effects
Industry effects
# firms
# countries
0.10
yes
yes
4,349
15
0.21
yes
yes
3,025
5
0.18
yes
yes
7,374
20
**
OLS
Summary of the results
• Similar demand for credit in Eastern & Western Europe
– firms with alternative financing channels demand less
– small firms demand less!
Credit discouragement (Table 5)
Small Firm
Age
Owner foreign
Exporter
Audited
Mills ratio - Need loan
Method
Selection corrected
Pseudo R2
Country effects
Industry effects
# firms
# countries
Eastern Europe
0.129***
0.001
-0.114***
-0.017
-0.074***
-0.051***
Probit
yes
Western Europe
0.040***
-0.015
-0.006
-0.041***
-0.026
-0.006***
Probit
yes
E vs. W
***
0.16
yes
yes
3,031
15
0.12
yes
yes
1,930
5
0.17
yes
yes
4,961
20
excluded variable: Internal financing
OLS
yes
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
Credit denial (Table 7)
Small Firm
Age
Owner foreign
Exporter
Audited
Mills ratio - Discouraged
Method
Selection corrected
(Pseudo) R2
Country effects
Industry effects
# firms
# countries
Eastern Europe Western Europe
0.025*
-0.007
-0.013***
0.001
0.027
-0.025*
0.021*
0.000
-0.032***
0.059***
0.147**
Probit
Probit
yes
yes
0.09
yes
yes
2,188
15
0.09
yes
yes
1,610
5
E vs. W
**
*
OLS
yes
0.05
yes
yes
3,900
20
excluded variables: Tax, Licencing & permits, Corruption
Predicted denial rates for discouraged firms (Table 8)
Non-discouraged
borrowers
Rejection rate in %
(actual)
Eastern Europe
7.6%
Western Europe
4.7%
Discouraged
borrowers
(predicted)
12.0%
7.7%
T-Test
***
**
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
Country determinants of credit constraints (Table 9)
Inflation
Foreign banks
Credit info
Creditor rights
Method
Selection corrected
Pseudo R2
Firm variables
Country effects
Industry effects
# firms
# countries
Dependent variable
Discouraged
Rejected
0.003
0.001
0.002***
0.000
0.010
-0.003
0.007
0.003
Probit
Probit
yes
yes
0.14
yes
no
yes
4,961
20
Eastern & Western European samples pooled
0.07
yes
no
yes
3,900
20
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
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
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