Does Corruption Affect Access to Bank Credit for Micro and Small Businesses? Evidence from European MSMEs | Asian Development Bank

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Does Corruption Affect Access to Bank Credit for Micro and Small Businesses? Evidence from European MSMEs

Publication | July 2017
Does Corruption Affect Access to Bank Credit for Micro and Small Businesses? Evidence from European MSMEs

Corruption in European countries can make it hard for small firms to borrow from banks.

In this paper, we assess how a specific socio-institutional environment, identified according to the level of corruption, can affect access to credit for micro, small, and medium-sized enterprises (MSMEs). Using a sample of 68,115 observations related to MSMEs chartered in 11 euro area countries during 2009–2014, we investigate whether the level of corruption affects their demand for bank loans.

Overall, we find that the degree of corruption seems to play a role in the applications for bank loans when small firms are under investigation. Results highlight that small businesses chartered in highly corrupt countries face a greater probability of self-restraint regarding their loan applications (about 7.4%) than small firms located in low-corruption economies (around 6%). The results are robust to various model specifications and econometric methodologies. Our findings suggest that anticorruption policies and measures enhancing transparency in the economy may be crucial in reducing the negative spillovers generated by a low-quality institutional environment on access to credit by small firms.

WORKING PAPER NO: 756