Does SBA Guaranteed Lending Improve Economic Performance in Low-Income Areas?

Abstract

Recent studies have provided evidence that financial market development leads to higher rates of economic growth. This is further investigated by focusing on the rationale that financial market development may increase the amount of external finance available to small firms. In particular, a test of whether Small Business Administration (SBA) guaranteed lending positively impacts economic performance in low-income markets is conducted.

It is hypothesized that credit market frictions, that is, costly information-gathering and verification of a small firm's project, lead to socially suboptimal credit allocation that negatively impacts the labor employment rate in the local market. If SBA guaranteed lending mitigates credit market frictions, a positive relationship should be seen between SBA guaranteed lending and level of employment, particularly in low-income financial markets. Loan-specific data on the borrower and lender was obtained from 1991 through 2002, including 360,000 loans. Economic data were also obtained for that time period.

Results show a positive and significant correlation between the average annual level of employment in a local market and the level of SBA guaranteed lending that market. The intensity of the correlation increases for low-income markets.

Keywords: Credit discrimination, Credit rationing, Economic development, Employment rates, Lending policies, Loans, Low income groups, U.S. Small Business Administration (SBA)

JEL Classification: G38, H81, O16