IMF research shows that the system plays a key role in the financing of SMEs -Part 6

Si Gyeongmin

Oct 20, 2021

3. Characteristics and supervision of the financial industry

The characteristics of the financial industry and financial supervision are also crucial for SMEs to obtain financing, especially:

(1) Bank profitability- the increase in bank profitability may reduce banks' motivation to obtain new risk assets such as loans to SMEs.

(2) Asset quality- a high non-performing loan ratio may reduce the willingness of banks to lend to small and medium-sized borrowers, such as small and medium-sized enterprises.

(3) Bank deposits- a higher degree of dependence on bank deposits can provide banks with more stable funds and promote loans to small and medium-sized enterprises.

(4) Stability of the banking sector- a more stable banking system can enhance bank loan confidence, thereby increasing the credit of SMEs.

(5) Concentration of bank loans- concentration of bank loans may reduce opportunities for SMEs to obtain credit, especially when banks focus on certain industries or markets.

(6) Financial sector regulations and supervision- a sound legal system and effective supervision are conducive to financial inclusion for SMEs.

We found a positive correlation between the stability of the banking industry, bank deposits, financial sector regulations and supervision, and financial inclusion for SMEs. On the contrary, the profitability of banks is often related to the reduction in the financing of SMEs. As mentioned earlier, banks may be reluctant to provide loans to risky SME borrowers when their profits are high. The non-performing loan rate is also negatively correlated with the financial inclusion of SMEs, which indicates that the decline in the quality of bank assets will further restrict SMEs’ access to credit. The average performance of MENAP and CCA countries in terms of asset quality is better than APD and WHD, but lags behind AFR and EUR. CCA countries lag behind other regions in terms of banking stability and deposit rate, while MENAP countries are, on average, the regions with the most concentrated banking industry.

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