Existence of credit rationing for SME’s in the Belgian corporate bank loan market

Abstract

Credit rationing is by many Keynesian economists nowadays seen as one of the most important examples of market failure in a modern capitalistic economy. Credit rationing occurs if in equilibrium the demand for loans exceeds the supply at the ruling price (interest rate). Since (Belgian) SMEs heavily rely on bank finance, this restricted access to bank finance could have a negative effect on the investment in new profitable projects and growth of the economy. Due to the lack of empirical research in this domain, we study the empirical significance of credit rationing for SMEs in a Belgian (bank based) context for the period 1993-2001. The novelty of our research consists of the distinction we make between credit rationing for long and short term bank credit. Moreover, in contrast to the numerous previous studies, pioneered by Fazzari et al. (1988), we opt for an endogenous classification into ‘credit rationed’ and ‘non credit rationed’ firms, allowing for switching between both groups throughout time. An extensive panel data set consisting of 2.698 SMEs reporting data over the period 1993-2001 is used to estimate the demand-supply disequilibrium model for long and short term bank debt. This is done by means of the instrumental variable technique 3 Stage Least Squares (3SLS). Based on these estimated models, the proportion of credit rationed SMEs is calculated. Our results suggest that, over the entire period, more than 50% of the Belgian SMEs are credit rationed for long and short term bank credit. In most years, long term bank credit is being slightly more rationed than short term bank credit, except in 2001. Moreover, in that year a spectacular increase in credit rationing of more than 10% is perceived. The results reveal that credit rationed firms for short term bank credit are smaller, faster growing firms with a low return on assets, added value, quick ratio, cash flow to assets ratio and much less accounts receivable and inventories to offer as collateral. For long term bank credit, credit rationed firms are in general smaller and younger firms with low cash flow to assets ratios, low growth rate and much less tangible assets to offer as collateral even though they have a higher added value and return on assets ratio than unconstrained firms. We can conclude from both analyses that constrained Belgian SMEs can be mainly characterized as young, small SMEs with little internal financial resources and a lack of assets to guarantee the repayment of debt.