Do World Bank Group's Investments in Developing Countries' Domestic Financial Sectors Improve Access to Finance for Small and Medium-Size Enterprises?

Abstract

from 2'008 supporting SMEs has been considered by the World Bank Group as a vital element of its private sector development strategy and has become one of the five main priority sectors for the International Finance Corporation (IFC)'s investments. This paper provides an empirical assessment of the effectiveness of the World Bank Group’s investments in the domestic financial sector of developing countries as a means to relieve the constraints of access to finance faced by Small and Medium-Size Enterprises. Our empirical model is based on data from the World Bank Enterprise Survey, which provides answers on perceived financing obstacles from more than 4'8000 enterprises in 86 developing countries. We show that World Bank Group's commitments in favor of domestic financial intermediaries lower SMEs' perceived financing obstacles. Moreover, the impact is the strongest on small enterprises. Finally, our results suggest that equity investments in local financial intermediaries are a more powerful instrument than debt financing in order to reduce the financial constraints of SMEs.