Do Local Banking Market Structures Matter for SME Financing and Performance? New Evidence from an Emerging Economy

Abstract

This paper investigates the relationship between local banking structures, SME access to debt financing and SME performance. Using a unique dataset on bank branch locations in Poland and county-level and firm-level data, we conclude that a strong position for local, cooperative banks facilitates access to bank financing, lowers financial costs and boosts investment and growth for SMEs. Moreover, counties where cooperative banks hold a strong position are characterized by a quicker pace of new firm creation. However, only local banking markets dominated by supra-local, foreign and domestic banks appear to exert pressure on SMEs to increase efficiency. Our results thus empirically document the advantages and disadvantages of the relationship and arms-length banking models. As a consequence, our findings are important from a policy perspective, as they show that foreign bank entry and industry consolidation may raise valid concerns for SME development prospects in emerging economies.