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

Abstract

Do foreign banks lend less to small and medium enterprises than domestic banks in developing countries? Analysis of data from four countries in Latin America suggests that although small foreign banks lend less than small domestic banks, the difference for large banks is considerably less. In recent years foreign bank participation has increased tremendously in Latin America. Some observers argue that foreign bank entry will benefit Latin American banking systems by reducing the volatility of loans and deposits and increasing efficiency. Others are concerned that foreign banks might choose to extend credit only to certain customers, leaving some sectors - such as small businesses - unserved. Clarke and his coauthors examine this issue. Using bank-level data for Argentina, Chile, Colombia, and Peru during the mid-1990s, they empirically investigate whether bank origin affects the share and growth rate of bank lending to small businesses. They find that although foreign banks generally lent less to small businesses (as share of total lending) than private domestic banks, the difference is due primarily to the behavior of small foreign banks. The difference was considerably smaller for large and medium-sized banks. And in Chile and Colombia, large foreign banks might actually lend slightly more (as share of total lending) than large domestic banks.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the impact of entry by foreign banks on domestic banking systems in Latin America. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433.

Keywords: foreign bank entry, small business lending

JEL Classification: G21, G3