How Bank Competition Affects Firms’ Access to Finance

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Combining multi-year, firm-level surveys with country-level panel data for 53 countries, the authors explore the impact of bank competition on firms' access to finance. They find that low competition, as measured by high values of the Lerner index, diminishes firms' access to finance, while commonly-used bank concentration measures are not robust predictors of firms' access to finance. In addition, they find that the impact This paper is a product of the Finance and Private Sector Development Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at of competition on access to finance depends on the environment that banks operate in. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can exacerbate the negative effect. Economist in the Finance and Private Sector Development Team in the Development Research Group of the World Bank. We thank Sandeep Singh and Diego Anzoategui for excellent research assistance. We are also grateful for funding received for this project from the Knowledge for Change Program. The paper's findings and conclusions are those of the authors and do not necessarily reflect the views of The World Bank. The impact of bank competition on financial markets and firms is an important topic for policymakers and researchers alike. 1 Interest on this subject intensified during the recent global financial crisis, as many questioned whether high competition was partly to blame. 2 At the same time, the downfall of some institutions as a result of the crisis and …