Banking Market Structure, Institutions, and SMEs’ Access to Finance in Transition Economies: The Case of Ukraine

Abstract

We investigate the impact of local banking market concentration on small and medium-sized enterprises’ access to finance in Ukraine, as an under-researched case of a country where crime and corruption rates are high. We combine firm-level observations from the EBRD’s BEEPS survey with unique, self-collected data on local banking markets. We take into account the specific context of a transition economy by introducing measures of institutional weakness. Our results show a non-monotonic relationship between banking market concentration and access to finance. Across all firms, some banking market power proves to increase access to finance, but too much concentration has an adverse effect. This is consistent with the theories that stress the importance of asymmetric information. However, for SMEs with higher perceptions of institutional weakness, we find that access to finance improves at both the lowest and highest levels of banking market concentration. We conjecture that such a dual impact might be typical for transition economies.