How Firm Characteristics Affect Credit Rationing among Small and Medium-sized Enterprises in the Euro Area

Access to finance is critical for businesses since it allows them to expand operations, upgrade equipment, or launch new projects, thereby assisting in their development and increasing their competitiveness. Access to finance, on the other hand, is typically correlated with firm size, implying that the smaller the company, the more difficult is to access external financing options. Small and medium-sized enterprises (SMEs) face greater challenges than large firms. Additionally, smaller firms are more dependent on external funding due to their limited equity and internal funds, they may, thus, be more vulnerable if adequate funds are not available. Bank financing is one of the most important external sources of funding for SMEs. They may, however, face credit rationing (CR) in the bank loan markets. Banks may refuse credit to businesses in varying degrees, either completely rejecting a loan application or only providing a limited amount. Some studies suggest that SMEs experience a higher rate of credit rationing than larger firms (Kundid and Ercegovac, 2011; Balogun, Nazeem and Agumba, 2016). This could be due to a variety of factors, including information asymmetry between SMEs and banks, or, in a more narrow sense, specific attributes such as firm characteristics which may cause this informational gap. However, any barriers to the bank loan process will have a significant negative impact on the growth and survival of smaller businesses and, ultimately, the entire economy. Credit rationing is a worldwide phenomenon that exists in almost every banking system. (Drakos and Giannakopoulos, 2011) report the presence of credit rationing in Eastern European countries, showing that credit rationing is different between firms; it is less likely for larger and more profitable firms. Another study looked at the effect of a firm's age, size, and ownership structure in 80 developed and developing countries, and the results show that older, larger, and foreign-owned businesses have a lower likelihood to be credit rationed (Beck et al., 2006). Furthermore, firms that decide not to apply for bank loans because they are afraid of being rejected should not be overlooked, as this group of discouraged borrowers is considered credit rationed in literature. The study of (Chakravarty and Xiang, 2013) examines drivers of discouraged borrowers globally, and their findings show that the existence of discouraged borrowers also varies by country and firm characteristics. Hence, in this thesis, a comprehensive review of the credit rationing literature is conducted in order to collect credit rationing determinants. In fact, the goal is to investigate the determinants of credit rationing in eurozone SMEs and assess how these factors contribute to different forms of credit rationing. Two steps are taken here to investigate credit rationing more precisely. First, empirical data are analyzed to determine the trends of different forms of credit rationing for SMEs in the euro area over time, and then a multinomial logistic regression (MRL) is run to gain a more in-depth understanding of the relationship of determinants, including firm characteristics, with each form of credit rationing separately. The database used is microdata from Survey on the Access to Finance of Enterprises (SAFE) conducted by the European Central Bank (ECB) from 2009 to 2022.