Ural Federal University Economists Reveal How Loans Promote Business Growth
The economists of the Ural Federal University’s Institute of Economics and Management found out, that a well-developed banking system, credit availability and institutional environment are extremely important for the activities of enterprises. They measured the impact of the bank loans and the degree of governors’ influence on the Micro, Small and Medium Enterprises (MSME) growth for 84 regions of Russia (data from 2016 to 2021). The results of the study are published in the Journal of Business Research. The study was supported by the grant of the Russian Science Foundation (Project No. 19-18-00262 “Empirical modelling of balanced technological and socioeconomic development in the Russian regions”).
“Given the considerable heterogeneity across regions, time and reverse causality, we applied the Panel Quantile Regression via Moments (MM-QR). Our empirical investigation demonstrates that bank credit disbursement and MSME growth follow a non-monotonic relation, implying that up to the specific size of the credit is detrimental, but after surpassing the threshold size, it is supportive to MSME growth under each quantile,” explains study co-author Kazi Sohag, head of the Laboratory of International and Regional Economics at Ural Federal University.
According to economists, this is due to the fact that small size of loans to MSMEs bear similar magnitude of transaction costs as a relatively higher size of loan. In addition, MSMEs face disproportionately high collateral and rates of interest, which also affects business growth.
Researchers have identified a U-shaped relationship between bank loans and MSME growth rates. As explained by economists, in the context of insufficient financial accessibility in the regions, banks lend mostly to larger and more well-established businesses. In other words, they support those in whom they trust and in whose reliability they can be confident. The researchers believe, that the situation should be changed and the procedure should be made more transparent, to create a system of credit scoring.
“The U-shaped relationship between the availability of bank loans and the growth of MSMEs can be explained by the fact that with a limited amount of loans, financing is primarily provided to large enterprises, while MSMEs experience a lack of credit. This is also due to the fact that MSME credit-worthiness is more difficult to analyze,” explains Oleg Mariev, co-author of the study and head of the Ural Federal University’s Department of Economics.
When the supply of credit surpasses a threshold level, adds Oleg Mariev, the opportunities for MSMEs to obtain financing increase, and this promotes the growth of these enterprises.
The situation is similar in other countries. As economists explain, their foreign colleagues conducted similar studies in 43 countries from 2004 to 2012 and found that the ability to obtain credit is extremely important for entrepreneurship. However, MSMEs have problems obtaining credit because banks consider larger enterprises to be relatively more reliable.
Apart from access to finance, institutional quality and the role of governors play an important role in determining MSME development, who, on the one hand, build close relationships with big business and, on the other hand, with the federal government.
The economists’ recommendation in this area is decentralization of power and transparency of relations between the federal and regional levels of government. In addition, it is necessary to generally create a business environment that is equally favorable for all enterprises. This implies improving institutions, formal and informal rules and regulations and their implementation.
“Along with MSME funding, we look at the institutional environment in which companies operate based on a variable reflecting the influence of governors at the federal level. The analysis of this variable emphasizes the need to improve the institutional environment in which companies operate. This is especially important for MSMEs due to their relatively greater sensitivity to the quality of institutions,” says Natalia Davidson, the co-author of the article and associate professor of the Department of International Economics and Management at UrFU.
Note that MSMEs are essential for the Russian economy because they contribute to economic growth, innovations, employment opportunities, galvanize the private sector, and help reduce reliance on natural resources in the context of the Russian economy.