The 'Opaque Glitter' of Small and Medium Sized Businesses in Transition Countries: Are Foreign Banks Interested in SME Lending after All?

Abstract

We investigate foreign banks’ interest in financing small and medium sized enterprises in Ukraine, a country where massive foreign bank entry took place in a late stage of transition. We use unique, self-collected bank-level data on banks’ involvement with SMEs in 2004, 2006, 2009, and 2010. We find that initially foreign banks were neither less nor more interested in financing SMEs than domestic banks. However, with the surge in foreign-bank presence in 2005-2006, acquired foreign banks started demonstrating a higher involvement with SMEs relative to not only domestic banks, but also to greenfield foreign banks. The mode of entry of foreign banks thus clearly matters. And so does their country of origin: acquired banks from long-standing market economies are more inclined to offer SME-specific products in general, whereas their counterparts from post-socialist countries are more likely to provide loans to SMEs and run SME promotion activities. Overall, our findings are consistent with the recent literature that challenges the conventional wisdom that foreign banks are not interested in lending to SMEs.

Keywords: Access to finance, Foreign banks, Small banks, SMEs, Transition economies

JEL Classification: F36, G21, L11, L14, P27