THE ECONOMIC IMPORTANCE OF CREDIT REPORTING REFORM

The Relationship Between Access to Finance and Job Growth

with a Highlight on Credit Reporting

Ayyagari, Meghana; Juarros, Pedro; Martinez Peria, Maria Soledad; Singh, Sandeep. 2016. Access to
Finance and Job Growth: Firm-Level Evidence across Developing Countries. Policy Research Working
Paper; No. 7604. World Bank, Washington, DC. © World Bank.
https://openknowledge.worldbank.org/handle/10986/24146

License: CC BY 3.0 IGO.

This paper investigates the effect of access to finance on job growth in 50,000 firms across 70 developing
countries. Using the introduction of credit bureaus as an exogenous shock to the supply of credit, the
paper finds that increased access to finance results in higher employment growth, especially among
micro, small, and medium enterprises. The results are robust to using firm fixed effects, industry
measures of external finance dependence, and propensity score matching in a complementary panel data
set of more than four million firms in 29 developing countries. The findings have implications for policy
interventions targeted to produce job growth in micro, small, and medium enterprises.

Key Findings:

 Increased access to finance results in increased job growth in developing countries

 Firms with access to a loan exhibit employment growth between 1 and 3 percentage points larger
than firms with no access to finance
 Introduction of credit bureaus (CBs) increases employment growth by over 5 percentage points
compared to countries where CBs do not exist
 Association between finance and job growth is stronger among micro, small, and medium
enterprises (MSMEs) than among large firms
 MSME firms with access to a loan have between a 1 and 4 percentage point larger employment
growth than MSMEs without a loan
 Introduction of CBs elicits a job growth response among MSMEs that is over six times larger than
that among large firms

Other relevant research:

Beck, T., Demirgilq-Kunt, A. and M. Martinez Peria (2008a), "Banking SMEs Around the World: Lending
practices, business models, drivers and obstacle", Policy Research Working Paper 4785, The World
Bank, Washington.

Using data from a survey of 91 banks in 45 countries, the authors characterize bank financing to small
and medium enterprises (SMEs) around the world. They find that banks perceive the SME segment to be
highly profitable, but perceive macroeconomic instability in developing countries and competition in
developed countries as the main obstacles. To serve SMEs banks have set up dedicated departments
and decentralized the sale of products to the branches. However, loan approval, risk management, and
loan recovery functions remain centralized. Compared with large firms, banks are less exposed to small
enterprises, charge them higher interest rates and fees, and experience more non-performing loans from
lending to them. Although there are some differences in SMEs financing across government, private, and
 THE ECONOMIC IMPORTANCE OF CREDIT REPORTING REFORM

foreign-owned banks - with the latter being more likely to engage in arms-length lending - the most
significant differences are found between banks in developed and developing countries. Banks in
developing countries tend to be less exposed to SMEs, provide a lower share of investment loans, and
charge higher fees and interest rates. Overall, the evidence suggests that the lending environment is
more important than firm size or bank ownership type in shaping bank financing to SMEs.

Beck, Thorsten, Asli Demirgüç-Kunt, and Vojislav Maksimovic. 2005. “Financial and Legal Constraints to
Firm Growth: Does Firm Size Matter?” Journal of Finance 60(1): 137–77.

In this paper, the authors used a size-stratified survey of over 4,000 firms in 54 countries to assess (1)
whether financial, legal, and corruption obstacles affect firms’ growth; (2) whether this effect varies across
firms of different sizes; (3) whether small, medium-sized, and large firms are constrained differently in
countries with different levels of financial and institutional development; (4) the specific characteristics of
the legal system that facilitate firm growth; and (5) the importance of corruption in financial intermediaries
to firm growth.

The findings highlighted that;

 The results indicate that the extent to which financial and legal underdevelopment and corruption
constrain a firm’s growth depends very much on a firm’s size. The authors showed that it is the
smallest firms that are consistently the most adversely affected by all obstacles.
 Firms that operate in underdeveloped systems with higher levels of corruption are affected by all
obstacles to a greater extent than firms operating in countries with less corruption.
 A marginal development in the financial and legal system and a reduction in corruption helps
relax the constraints for the small and medium-sized firms, which are the most constrained.
 Difficulties in dealing with banks, such as bank paperwork and bureaucracies, and the need to
have special connections with banks, do constrain firm growth.
 Collateral requirements and certain access issues—such as financing for leasing equipment—
also turn out to be significantly constraining.
 Macroeconomic issues captured by high interest rates and lack of money in the banking system
also significantly reduce firm growth rates.
 Legal and corruption obstacles, particularly the amount of bribes paid, the percentage of senior
management’s time spent with regulators, and corruption of bank officials, also represent
significant constraints on firm growth.

Beck, Thorsten, Ross Levine, and Norman Loayza. 2000. “Finance and the Sources of Growth.” Journal
of Financial Economics 58(1–2): 261–300.

This paper evaluated the empirical relation between the level of financial intermediary development and
(i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private
savings rates. The authors used (a) a pure cross-country instrumental variable estimator to extract the
exogenous component of financial intermediary development, and (b) a new panel technique that controls
for biases associated with simultaneity and unobserved country-specific effects. After controlling for these
potential biases, the authors found that:

 Financial intermediaries exert a large, positive impact on total factor productivity growth, which
feeds through to overall GDP growth, and
 The long-run links between financial intermediary development and both physical capital growth
and private savings rates are tenuous.