Bank Competition and Access to Finance: Evidence from African Countries

Abstract

Whether competition helps or hinders firms’ access to finance is a much-debated question in economic literature and policy issues. This study considers the consequences of bank competition on credit constraints using rich enterprise-level data set from the World Bank’s Enterprise Surveys. The study addresses 9632 firms from 27 African Countries. In addition to classical concentration measure, competition is measured by three non-structural measures (Boone indicator, H-statistics and Lerner index). The results show that bank competition worsens credit/financing constraints which supports the information hypothesis. However, further investigations show that bank competition has a significant positive effect on firms’ need for external financing, decision to apply for new line of credit and banks loan approval decision. Despite higher loan application approval rate by banks, large proportion of firms are discouraged to apply for bank loan. Small, medium and young firms are more likely to report higher financing constraints, more likely to need external financing but less likely to apply for bank loans and have low access to bank loan.