Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers

This paper informs that foreign banks have achieved an important role in many developing countries. However, some observers suggest that it might reduce access to credit, particularly for small and medium-sized enterprises (SMEs).This paper uses responses from a survey of over 4,000 enterprises in 38 developing and transition economies and investigates the impact of foreign bank entry on enterprises' access to credit.The results suggest:

• In countries where foreign penetration in the banking sector was higher, enterprises financed a greater share of investment through bank lending;
• Small (fewer than 50 employees) and medium-sized enterprises (between 50 and 200 employees) tend to finance considerably less investment through the banking sector than large enterprises;
• Interest rates and access to long-term loans as lesser constraints for an average enterprise in countries with higher levels of foreign bank penetration.

The paper concludes that:

• Empirical results strongly support that foreign bank penetration improves firms' access to credit;
• Benefits of high levels of foreign bank penetration do not accrue only to large enterprises;
• Although small enterprises benefit from higher penetration by foreign banks, large enterprises appear to gain more.