Bank Lending to Small Businesses in Latin America: Does Bank Origin Matter?

Using statistical techniques, this paper examines whether foreign banks in the Latin American countries choose to extend credit only to certain customers, leaving some sectors, like small businesses unattended.

In particular, using bank level data for Argentina, Chile, Colombia, and Peru during the mid-1990s, this study investigates how bank origin affects the share and growth rate of bank lending to small businesses.

The analysis suggests that large foreign banks:

• Are more inclined to lending to small businesses in Argentina and Chile than in Colombia and Peru;
• increased their lending at faster rates than large domestic banks in Argentina and Chile;
• Had the highest estimated growth rates among all banks in Argentina;
• Devoted higher shares of their portfolios to small business lending compared to large domestic banks in Chile.

The authors state that while many explanations might be consistent with these results, the causal factors appear to be:

• Quality of the contracting environment such as enforceability of rights;
• Structure of the banking sector;
• Macroeconomic environment.