3) Banking Competition and Access To Finance

Bank Competition and Access to Finance:
Evidence from African Countries
Misraku Molla Ayalew & Zhang Xianzhi
Journal of Industry, Competition and

Trade
From Theory to Policy
ISSN 1566-1679
Volume 19
Number 1
J Ind Compet Trade (2019) 19:155-184

DOI 10.1007/s10842-018-0283-6
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Author's personal copy
J Ind Compet Trade (2019) 19:155–184
https://doi.org/10.1007/s10842-018-0283-6
Bank Competition and Access to Finance: Evidence

from African Countries
Misraku Molla Ayalew 1 & Zhang Xianzhi 2
Received: 9 February 2018 / Revised: 8 May 2018

Accepted: 31 May 2018 / Published online: 11 June 2018
# Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract Whether competition helps or hinders firms’ access to finance is a much-debated

question in economic literature and policy issues. This study considers the consequences of
bank competition on credit constraints using rich enterprise-level data set from the World
Bank’s Enterprise Surveys. The study addresses 9632 firms from 27 African Countries. In
addition to classical concentration measure, competition is measured by three non-structural
measures (Boone indicator, H-statistics and Lerner index). The results show that bank com-
petition worsens credit/financing constraints which supports the information hypothesis.
However, further investigations show that bank competition has a significant positive effect
on firms’ need for external financing, decision to apply for new line of credit and banks loan
approval decision. Despite higher loan application approval rate by banks, large proportion of
firms are discouraged to apply for bank loan. Small, medium and young firms are more likely
to report higher financing constraints, more likely to need external financing but less likely to
apply for bank loans and have low access to bank loan.
Keywords Access to finance . Africa . Banking competition . Credit constraints . Discourage

firms
JEL Classification D22 . G20 . L11 . O55
* Misraku Molla Ayalew

missmolla@yahoo.com
Zhang Xianzhi
zxz@dufe.edu.cn
1
Accounting School, Dongbei University of Finance and Economics, Dalian City, P.O. B 116025,
People’s Republic of China
2
Accounting School, Director, Sino-German Managment control Reseach center, Dongbei University
of Finance and Economics, Dalian, Liaoning, China
156 J Ind Compet Trade (2019) 19:155–184
1 Introduction
Limited access to bank credit is viewed by many policy-makers and academics as a major
growth constraint for emerging and developing economies (Brown et al. 2011; Mertzanis
2017). In developing countries firms face a high degree of financial exclusion and high barriers
regarding access to finance (Beck et al. 2009). Expanding access to financial service remains
an important challenge across the world, leaving much for governments to do (Beck et al.
2009). In Africa, following the recent economic stimulation many small and medium enter-
prise have been established. However, limited access to finance impedes their growth and
operations. Firm-financing gap is likely going to be a bigger problem for African countries
than for countries in other developing regions (Fowowe 2017).
An efficient financial system is important to expand financial services and for long-term
economic development(Beck et al. 2007). Policy actions aim to improve efficiency and
competitiveness of financial system however, not all policy actions are equally effective as
some policies can even be counterproductive (Beck et al. 2009). In this regard, African
countries are severely disadvantaged in financial development (Beck et al. 2009). The degree
and the impact of competitiveness in the banking sector is of great importance as this has great
impact on the financial system and the wider economy (Banya and Biekpe 2017). Competition
in the banking sector affects the efficiency,quality and degree of innovation of financial
services (Claessens 2009). Competition in the banking sector is often cited as an important
driver of access to credit (Claessens and Laeven 2004; Leon 2015).
However, whether competition helps or hinders firms’ access to finance is a much debated
question in the economic literature and in policy circles having gained prominence in the
developing world (Leon 2015). Generally, existing literature concentrates on two competing
views; the information hypothesis which emphasizes relationship lending, and the
market power hypothesis which follows from the Structure–Conduct Performance
approach. To date, the empirical studies show mixed results. For example, Beck
et al. (2004), Leon (2015) and Bernini and Montagnoli (2017) findings support
market-power hypothesis. In contrast, Dinc (2000), Hoxha (2013) and Love and
Martínez Pería (2015) results support information-hypothesis.
Banking in Africa has witnessed significant reforms over the last three decades
following a long period of poor performance (Banya and Biekpe 2017) whose intent
is to enhance competitiveness and intermediary efficiency. Moreover, it creates con-
ducive environment for increased foreign bank entry and allows acquisition of foreign
assets by domestic financial firms (Moyo et al. 2014). Previous studies conducted in
Africa have mainly focused on the determinants of banking competition and profit-
ability, the impact of competition on economic growth, and bank efficiency and
measure of competitiveness condition. To the best of our knowledge no empirical
study has been made to investigate the effect of banking competition on firm’s access
to finance in Africa. Limited international studies made by Beck et al. (2004), Love
and Martínez Pería (2015) and Leon (2015) include some African countries in their
studies. However, due to unique nature of banking system in Africa, separate inves-
tigation is desirable.
This study conducts an empirical investigation of the effects of banking competition on
firm’s access to credit in Africa. This is a pioneer study that focuses on African countries. In
order to achieve this, we make use of a rich enterprise level dataset from the World Bank’s
Enterprise Surveys and country-level data are obtained from various source. The study utilizes
J Ind Compet Trade (2019) 19:155–184 157
9632 firms of various nature from 27 African countries. We contribute to the growing literature
in different ways. First, we provide new evidence on whether banking competition worsens or
hider credit constrains in Africa. Secondly, we disentangle the differential impact of compet-
itive pressure on a firms’ need for external financing, decision to apply for bank loan and
banks loan approval decision. Thirdly, we show the depth of financing constrains in Africa
considering firms variation in ownership structure, legal establishment, business activities and
other important firm-specific factors. Finally, the hall-mark of this study is exhaustive utiliza-
tion of measures of competition in investigating its impact on firms’ access to finance that
majority of previous studies lacks.
2 Literature Review
2.1 Banking Competition Measures
The purpose of this study is to investigate the implication of banking competition on firm’s
access to credit in Africa. The choice of the appropriate proxy for bank competition is therefore
crucial (Leon 2015). The several measures of competition in literature can generally be
classified into traditional structural measures and Non-structural measures. The traditional
measures use concentration indices under the efficient-structure hypothesis. K-banks concen-
tration (CRk) ratio is a method overly used under Structure-Conduct-Performance (SCP)
paradigm. The basic theory to this approach is that the market power of banking companies’
increases with industrial concentration and thus creates a direct link from industry structure to
competitive conducts. This approach, is criticized on different grounds. First, proxies used to
measure the CRk are ambiguous because they ignore the relationship between market
contestability and revenue at the bank-level (Beck et al. 2004). Moreover, the direction of
causality running from structure to conduct is not clear (Vesala 1995) and concentration ratios
are not necessarily related to the level of competitiveness in an industry (Baumol et al. 1982).
Secondly, Schaeck et al. (2009) argue that it is inappropriate to rely on concentration to assess
the degree of competition in banking.
Non-structural measures are based on the New Empirical Industrial Organization (NEIO)
paradigm which makes inferences about competitive pressure by directly observing conduct of
firms in the market (Banya and Biekpe 2017). Under this paradigm, there are three commonly
used methods to test level of competition and market power; the Panzar and Ross H-statistic,
Lerner Index and Boone Indicator. The Panzar and Ross H-statistic shows the elasticity of
bank revenues relative to input prices. The weak transmissions of input price to marginal cost
are interpreted to indicate the exercise of market power in pricing and higher values indicate
more competition. It measures the degree of bank-competition over a specific period of time
however it does not capture the evolution of bank-competition (Banya and Biekpe 2017).
An alternative methodology to estimate competition is the Lerner model developed by
Lerner (1934). This is developed from the static theory of firm models under equilibrium
conditions and typically uses some form of price mark-up against a competitive benchmark
(Banya and Biekpe 2017).The Lerner index is often used in empirical works to indicate market
power. It measures the degree of market power by focusing on the pricing power apparent in
the difference between price and marginal cost (Saurina Salas et al. 2007). It also captures the
extent to which banks can maintain a price level above their own marginal costs. The higher
values of the Lerner index are linked with higher levels of market power. In addition, it
captures the influence of both market concentration and demand elasticity and thus is
preferable compared to other concentration indicators (De Guevara and Maudos 2011). While
The PR-model provides an aggregate measure of competition, Lerner index provide an
individual measure of market power. The approach was criticized by Boone et al. (2013)
who postulate that the Lerner index at the country level consistently has problems picking up
increasing competition due to more aggressive conduct of incumbent firms. The Lerner index
is sensitive to the reallocation of activity from inefficient to efficient firms when competition
intensifies. This issue is particularly relevant in concentrated markets that encompass the
banking industry in many developing countries (Leon 2015).
Boone (2008) developed a new indicator called Boone indicator. It is based on the idea that
efficient firms are more rewarded in more competitive markets. The basic intuition underlying
this indicator is that more efficient firms achieve superior performance in the sense of higher
profit or higher market shares, and that this effect is stronger the heavier the competition is.
The hypothesis of Boone’s model takes two steps. First, efficient banks, i.e. banks with lower
marginal costs, gain higher market-share or profits. Second, this is translated into the fact that,
the stronger the effect, the higher the degree of competition in that particular market (Banya
and Biekpe 2017). Boone et al. (2007) shows that the Boone indicator can be calculated as the
elasticity of profits to marginal costs. The coefficient of marginal cost (the elasticity) obtained
from the estimate result of the log of return on assets regressed against to a log measure of
marginal costs. The sum of coefficients the three input prices from estimated translog cost
function gives marginal cost. The more negative coefficient of marginal cost in the regression
is the higher the level of competition is in the market (Boone 2008). However, in some cases a
positive coefficient of marginal cost from regression estimation will be possible, implying that
the higher a bank’s marginal cost, the higher its market shares. Leon (2015) clearly express the
advantages of Boone indicator. It catches competition due both to a fall in entry barriers and to
more aggressive behavior on the part of incumbents and also capture the dynamics and non-
price strategy in the market. To investigate the effect of banking competition on access to
finance, our present study used all the above four measures of banking competition.
2.2 Banking Competition and Access to Finance
There are two contradicting theories regarding the relationship between bank competition and
access to finance. The general economic theory outlines the inadequacies of market power
which supply less loan at a higher interest rate. However, information asymmetries and agency
problems might result in a positive or nonlinear relation between the market power of
intermediaries and the amount of loans lent to opaque borrowers in a dynamic setting (Beck
et al. 2004). Structure–performance hypothesis argue that market power results in a lower
supply at a higher cost, hence reducing firm growth. Under structure-performance paradigm,
the interaction between banking competition and access to credit can be interpreted
based on demand and supply-side. On the demand side, firms operating in a compet-
itive industry generally have lower markup, profits, and retained earnings cause
inefficiency for internal financing and leads greater need for external funding. On
the supply side, lenders may attach a greater risk of default to firms that are exposed
to domestic and foreign competition (Bernini and Montagnoli 2017).
Based on survey data from 74 countries, Beck et al. (2004) found out that in more
concentrated credit markets, firms of all sizes face higher financing obstacles and the impact
of concentration decreases with firm size. Using large sample of 28,642 firms from 69
developing nations, Leon (2015) found out that financing constraints are alleviated in countries
where banking markets are more competitive. Leon (2015) work appreciated in its rigorous use
of different banking competition measures such as concentration ratio, Boone indicator,
Panzar-Rosse H-statistic and Lerner index. In addition, using firm-level survey data from 27
emerging economies of Eastern Europe and Central Asia Bernini and Montagnoli (2017) find
results that support the hypothesis that competitive pressure on borrowers affects both sides of
the credit market. They find in industries with greater competitive pressure firms’ demand for
credit is higher but a greater proportion of firms are discouraged from loan application due to
greater cost of credit. Their results point to the role of competitive pressure in the lenders’
information set when limited information is available.
Informational asymmetries predict a positive or nonlinear relation between market
power and access to loans for opaque borrowers in a dynamic setting. Informational
asymmetries between lender and borrower result to adverse selection, moral hazard
and hold-up problems (Beck et al. 2004). Access to credit for opaque borrowers can
decrease when competition is tougher. In the presence of information asymmetries, the
financial market might not necessarily facilitate the allocation of resources toward the
most productive firm (Bernini and Montagnoli 2017). In the presence of asymmetric
information, firms’ characteristics become important to determine if a project is viable
and whether the firm would be able to obtain the necessary financing. Asymmetric
information may impose financial frictions which cause external funding to be more
expensive than internal funding resulting to factors like firm size, net worth and cash
flow becoming of great importance (Bernini and Montagnoli 2017). Dinc (2000)
found out a non-linear (inverted U-shaped) relation between the amount of relation-
ship lending and the number of banks. Using Panzar and Rosse H-statistic, Hoxha
(2013) results support the information hypothesis. In addition, using a panel data
analysis on 53 developing countries, Love and Martínez Pería (2015) show that the
use of bank loans is lower in more competitive markets thus providing additional
support for the information hypothesis. Finally, beyond banking competition, access to
credit is dependent on borrower-specific characteristic, macro-economic and institu-
tional development. In this regard, Love and Martínez Pería (2015) postulate that the
link between access to finance and banking competition depends on the institutional
and economic environment.
3 Data
The data used in this paper combines firm and country level data from various sources. The
firm-level data come from the World Bank Enterprises Surveys (WBES). WBES covers more
than 130,000 firms in 125 countries all over the world. It mainly focuses on factors that shape
the business environment in addition to those factors that accommodate or constrain firms and
play an important role in a country’s development. In addition, the dataset is supplemented
with country-level data from diverse sources such as the World Development Indicators, the
Global Financial Development Database, and the Doing Business database.
Our firm-level data utilizes the survey conducted from the year 2013 to 2016. By
Restricting the sample to the most recent survey has different advantages and insights.
Regardless of methodological and other differences with this paper, Beck et al. (2004), Leon
(2015) and Léon and Weill (2017) investigate the effect of banking competition on firm’s
access to credit based on the enterprise survey data conducted before 2013. Therefore, it needs
to avoid sampling repetition across similar studies. Moreover, in investigating the effect of
banking competition on access to finance it’s important to pay attention to the use of recent
data because policy makers, politicians and international organizations are more committed to
improve access to finance. Therefore, it is important to know the effects of these recent efforts
made. During the year between 2013 and 2016, the World Bank conducted enterprise survey
on 28 African countries. Among them 11 countries were surveyed in 2013, 8 countries in
2014, one country in 2015 and the remaining 8 countries surveyed in 2016.
Different screening criteria are used. Country-level data for at least one measure of
competition (banking concentration, Boone indicator, Lerner index or H-statistics) must be
available to include a country in the study. South Sudan is excluded in the country sample due
to unavailability of data for one of the four banking competition measures. Finally, 27 African
countries are included in this study.
Regarding firm selection, various screening criteria are used and finally 9632 firms satisfy
these criteria. Most of the firms are dropped due to data inconsistency. Our sample consists
5131 (53.27%) manufacturing, 1, 811 (18.8%) service, 459 (4.77%) publically listed, 7220
(74.96%) privately held, 1223 (12.70%) foreign owned, 7911 (82.13%) domestically owned,
185 (1.92%) government owned and 1424 (14.82%) exporter firms. Breaking down the dataset
by firms’ size and age; small firms (5–19 employees) constitute the largest size group
accounting for 5105 (53%) of the sample, medium firms (20–99 permanent em-
ployees) constitute 3037 (31.53%) and the remaining 1490 (15.47%) are large firms
(more than 100 employees). Most of the firms in the sample (70%) are relatively
young as they have been operating for less than 20 years at the date of the interview.
Hence, our sample over-represents small and young companies that are more likely to
face binding financial constraints (Bernini and Montagnoli 2017). The correlation
between variables is low for both firm-specific and country-level variables and it
presented on Tables 11, 12 and 13 in the Appendix.
4 Measurement, Methodology and Hypothesis
4.1 Measuring Banking Competition
The purpose of this study is to investigate the implication of banking competition on firm’s
access to finance. The choice of the appropriate proxy for bank competition is therefore
crucial. The theory and empirical works clearly show reliance on single measurement of
competition and market power may be not enough and thus it’s misleading to some extent.
Hence, this study used four different proxies to measure competition: CR, Boone indicator, H-
statistic and Lerner index. Based on the well-known bank data provider - BankScope, World
Bank staff computed competition measures at country-level and reported in the Global
Financial Development Database (GFDD).
Based on balance sheet data of banks the K-banks concentration ratio calculated as follows;
CRkt¼ ∑ni¼1 Si ð1Þ
Where N is the three or five largest banks, Si is each of the three bank’s share in the total assets
of the banking industry. The number of banks included in the concentration index is an
arbitrary decision since there is no rule for the determining the value of k. A higher value
indicates that the monopoly power of a few banks in the sectors (Table 1).
Rosse and Panzar (1977), as further expanded by Panzar and Rosse (1987) developed an
approach to measure competition based on a reduced-form revenue equation (Barros and
Mendes 2016). The model incorporates bank specific differences and measures competition by
calculating the H-statistic which is obtained by summing the elasticities of revenue with
respect to input prices. The PR model is given as follows:
LnðRevit Þ ¼ α þ ∑LL¼1 βlLnðWl; itÞ þ ∑KK¼1 ðγkZk; it þ μi þ εit ð2Þ
Where Rev denotes total revenue from bank i in period t. Wl,it represents the three inputs: labor,
capital and fund. Zk Denotes control variables and finally, μ and ɛ represents bank fixed effects
Table 1 Summary statistics
Variable Obs. Mean Std. Dev. Min Max
Dependent variable
Credit constraint 9632 0.395 0.4889 0 1
Financing constraint 9632 0.3644 0.4813 0 1
Apply 9632 0.1953 0.3964 0 1
Need 9632 0.5735 0.4946 0 1
Accepted 1881 0.9139 0.2806 0 1
Firm-level control variables
Size 9632 73.775 468.77 1 30,000
Age 9632 17.165 13.173 1 114
Experience 9632 18.129 10.892 1 100
Manufacturing 9632 0.5327 0.499 0 1
Service 9632 0.188 0.3907 0 1
Subsidiary 9632 0.1792 0.3835 0 1
Publically listed 9632 0.0477 0.213 0 1
Privately held 9632 0.7496 0.4333 0 1
Large owner 9632 0.8015 0.2546 0.1 1
Domestic owned 9632 0.8213 0.3831 0 1
Foreign 9632 0.127 0.333 0 1
Government 9632 0.0192 0.1373 0 1
Exporter 9632 0.1482 0.3553 0 1
Audited 9632 0.5976 0.4904 0 1
Female manager 9632 0.1123 0.3158 0 1
Working capital (WC) 9632 0.2401 0.3141 0 1
Construction 9632 0.742 0.3316 0 1
Competition country level independent variable
CR3 27 0.6135 0.1673 0.373 1
Boone 27 −0.079 0.117 −0.78 0.203
H-statistics 20 0.5024 0.2093 0.078 0.732
Lerner 22 0.304 0.0979 0.165 0.498
Country-level control variables
Legal right 27 4.2142 1.947 1 7
Credit information 27 3.3367 3.4316 0 8
Foreign bank 27 0.4921 0.258 0 1
Financial system Dev. 27 0.2651 0.166 0.051 0.761
Institutional Dev. 27 −0.671 0.4044 −1.62 0.359
GDP growth 27 0.0448 0.0282 −0.003 0.103
GDP per capita 27 3.1072 0.3435 2.342 3.749
Inflation 27 0.1031 0.0744 −0.02 0.349
Definitions and sources of the variables are provided in Appendix

and the usual error term respectively. The sum of the revenue elasticities with respect to input
factor prices is called H-Statistics,
H‐statistics ¼ ∑3l¼1 βl ð3Þ
The Lerner index is a relative mark-up of price over marginal cost and measures the banks’
exercise of market power (Lerner 1995). the Lerner index is a true reflection of the banks’
degree of market power because it represents the behavioural departure from monopoly and
perfect competition (Coccorese 2009). The Lerner index for country c is the weight average of
individual Lerner indices of all banks in country c as follows:
Lc ¼ ∑i∈c SicLic ð4Þ
Where Sic is the market share of bank i in country c and Lic the value of Lerner index for this
bank. The result of Lc generally lies between 0 and 1 where 0 means a perfectly competitive
behavior and the firm has no market power values close to 1 shows the weakness of the
competition at the price level indicating that the firm exercises a market power to a higher
mark-up. However, in condition of tough competition banks oblige to propose price under
marginal cost which brings down Lerner Index to negative.
The Boone indicator is based on the efficient structure hypothesis that links performance
with differences in efficiency. The Boone indicator can be calculated as the elasticity of profits
to marginal costs. To calculate this elasticity, the log of return on assets is regressed against the
log measure of marginal costs.
lnðROAit Þ ¼ α þ β1 lnðMCiÞ þ εi ð5Þ
Where ROA is stands for return on asset and MCi a measure of marginal cost. Marginal costs
are obtained from an estimated translog cost function with three inputs: labor, physical
capital and deposits. The more negative the β1-coefficient is, the higher the level of
competition in the market.
The summary of competition measures and other country-level variables is presented on
Table 14 in the appendix. The level and condition of competitiveness varies across countries
and sub-regions of Africa. Different measures of competition show different level of compe-
tition. For example, CR3 is highest in Guinea (Conakry) and lowest in Kenya, Boone indicator
is highest in Djibouti and lowest in Swaziland, H-statistics is higher in Egypt and lower in
Mauritania and Lerner index is higher in Ethiopia and lower in D.R. Congo. Where the higher
CR3, Boone and Lerner is interpreted as lower competition and higher h-statistics indicates
higher competition. In general, banking competition in North Africa is relatively stronger than
the remaining sub-regions.
Surprising differences are observed regarding country-level control variables. Legal right
protection varies maximum of 7 in Ghana and Kenya to the minimum of 1 in Djibouti. Depth
of credit information also varies the highest in Egypt (8 points), Ghana, morocco, Nigeria,
Swaziland and Namibia (6 point each) and the lowest in is 0 for more than half of countries.
The presence and share of assets of foreign banks in the industry varies 100% dominance in
Madagascar to 0 % in Ethiopia. The ratio of domestic credit to the private sector to GDP, here
we call financial sector development varies maximum of 76% in Tunisia to minimum of 5% in
Guinea (Conakry). Ethiopia recorded the highest growth rate (10.8%) which is double the
African average. In general, in legal right protection and openness to foreign bank operation
West African banks are better, while depth of credit information ad FSD is far better in North
Africa. On average, economic growth in East African is relatively higher than other regions.
4.2 Measuring Access to Credit
Credit constraints arise from a shortfall in the supply of credit to the current demand for credit
or vis-à-vis. There are different ways to measure access to credit e.g. using likelihood of loan
application (Cavalluzzo et al. 2002), financial obstacles (Beck et al. 2004), access to bank
finance (Beck et al. 2007), or credit constraint (Popov and Udell 2012). Our main empirical
model, utilizes the approaches in line with Beck et al. (2004), Popov and Udell (2012).
WBES is a rich dataset containing both subjective and objective measures of access to
finance and other enterprise issues. The key variables of interest in this paper are based on the
survey questions concerning firms’ access to credit and the need for external financing. Based
on this dataset, we measured firm’s access to finance as follows; determining whether the
establishment applied for new loan/line of credit in the last fiscal year (K16). Accordingly,
only 19.53% firms applied for new bank loan and 80.47% of firms did not apply for any new
loan or line of credit. Second, in order to determine the reason why firms do not apply for new
loan/line of credit in the last fiscal period we referred to K17- the main reason for not applying
for new loan/line of credit. It was established that 53% of firms didn’t apply because the
establishment need not any new loan/ credit line and the remaining 47% of firms didn’t apply
due to different reasons. Firms that state any reasons other than need not new loan or line of
credit are discourage to apply for new loan are categorized as discouraged firms thus totaling
1881 firms that apply for new loan and 3643 firms that are discouraged to apply thus resulting
to 5524 firms (57.35%) that need external borrowing. Third, to identify the outcomes of loan
applications we refer to question k20 - what was the outcome of application for credit/loan?
91% of loan applications were approved in full or in part and only 4.45% of loan applications
were rejected by banks. The rest of proportions were either withdrawn by applicants or the
application was in process as at the date of interview Table 2.
We refer K30 to investigate the extent to which how much of an obstacle access to finance
to their growth. We named this categorical variable financing obstacle. The answer to this
question varied between 1(no obstacle), 2 (minor obstacle), 3 (moderate obstacle), 4 (major
obstacle) and 5 (very sever obstacle). For simplicity of regression analysis, we merge ‘major
obstacle’ and ‘very sever obstacle’ together as major obstacle. Regardless of variation in the
level of obstacle, more than three quarters (3/4) of the firms reported access to finance as an
obstacle for their growth. Large proportion of firms (36.33%) reported access to finance as a
major and severe obstacle for growth while only 24% of the firms reported access to finance
wasn’t an obstacle to growth. Despite the measurement error due to the subjective evaluation
Table 2 Outcomes of loan application
Outcome of loan applications Freq. Percent Cum.
Application was approved in full 1667 88.62 88.62

Application was approved in part 52 2.76 91.39
Application was rejected 88 4.68 96.07
Application was withdrawn 19 1.01 97.08
Still in process 55 2.92 100.00
Total 1881 100.00
of the interviewees, this self-reported measure of financial constraints is useful to identify firms
that have difficult access to credit (Bernini and Montagnoli 2017). Finally, following Popov
and Udell (2012) and Leon (2015) approach we classified firms as credit constrained if they
were discouraged from applying for loan or were rejected upon application. This measure
allows us to identify firms expressing formal demand for funds that was not fulfilled by supply
(Leon 2015). This grouping allows identification of firms which opted out of the loan
application process due to the absence of a demand for loans or as a result of being
discouraged by market frictions in the credit market (Leon 2015) (Table 3).
Table 4 indicates the presence of substantial cross-country and sub-regional differences in
credit access and approval rates in Africa. In Cote d’Ivoire, Ghana, Tanzania, Swaziland,
Sudan, Senegal, Uganda and Zimbabwe, more than half of firms are credit constrained or have
no access to credit. Whereas, only 10% firms are faced credit constraints in Djibouti and
Morocco. The fraction of firms that apply for a loan varies between 1% in Sudan and 43% in
Tunisia. In Zimbabwe, 75% of firms are discouraged to apply for new line of credit while this
figure is only 12% in Djibouti. Another significant variation among countries is observed on
loan application approval rate. In majority of countries, all loan applications have been
accepted by banks. However, loan approval rate in Zimbabwe and Egypt is lower.
There are also sub-regional variations in access to credit. For instance, the credit constraint
is higher in West Africa (46%) and Southern Africa (43%) as compared to 26% in North
Africa. In West Africa, 66% of firms need credit but only 46% of them apply for new line of
credit. Regarding borrower’s discouragement, firms in North Africa are relatively less dis-
couraged compared to the rest of the sub-regions. Our limited sample indicates that there is no
loan application rejected by banks in East African countries. Finance as an obstacle to growth
is severe in West African firms. In general, more than 60% of firms in Africa need credit but
because they are discouraged, only 20% of them apply for loan. In Africa, more than 40% of
firms have no access to a bank loan. Loan approval rate by banks is more than 90% which is
higher compared to loan approval rate in developed nations.
4.3 Empirical Methodology
The objective of this study is to evaluate the effect of bank competition on firm’s
access to credit in Africa. Given the binary nature of the dependent variable, a binary
model is suitable than a linear model. The baseline econometric specification estima-
tion is as follows:

Pr credit constrained ij ¼ 1 ¼ Ф α þ βcompetition j þ θfirmij þ λc j ð6Þ
Table 3 Financing obstacles
Financing obstacles Freq. Percent Cum.
No obstacle 2325 24.14 24.14

Minor obstacle 1780 18.48 42.62
Moderate obstacle 2017 20.94 63.56
Major obstacle 2220 23.05 86.61
Very sever obstacle 1290 13.39 100
Total 9632 100
Table 4 Access to finance
Country Survey No. Credit Financing Apply Need Accepted Discouraged

year firms constraint obstacle
Burundi 2014 144 0.35 2.84 0.39 0.74 1 0.57

Djibouti 2013 144 0.1 2.01 0.1 0.21 1 0.12
Ethiopia 2015 728 0.44 2.46 0.29 0.73 1 0.62
Kenya 2013 576 0.23 2.26 0.3 0.53 1 0.33
Tanzania 2013 286 0.56 3.14 0.25 0.8 1 0.74
Uganda 2013 429 0.51 2.82 0.1 0.61 1 0.56
East Africa 2307 0.36 2.59 0.24 0.6 1 0.49
Egypt 2013 2256 0.28 2.58 0.07 0.33 0.57 0.28
Morocco 2013 267 0.1 2.34 0.26 0.36 1 0.13
Sudan 2013 87 0.52 2.32 0.01 0.53 1 0.52
Tunisia 2013 533 0.2 2.08 0.43 0.63 1 0.35
North Africa 3143 0.27 2.33 0.19 0.46 0.89 0.32
Dem. Rep. 2013 407 0.48 2.82 0.18 0.66 1 0.58
Congo
Lesotho 2016 105 0.32 3.21 0.31 0.61 0.91 0.43
Madagascar 2013 253 0.47 2.08 0.17 0.62 0.90 0.55
Malawi 2014 243 0.41 2.83 0.3 0.71 1 0.59
Namibia 2014 158 0.3 2.84 0.32 0.58 0.88 0.38
Swaziland 2016 91 0.51 2.38 0.2 0.7 1 0.63
Zimbabwe 2016 461 0.71 3.04 0.16 0.79 0.48 0.75
Southern 1718 0.46 2.74 0.23 0.67 0.88 0.56
Africa
Benin 2016 126 0.41 2.71 0.29 0.67 0.86 0.53
Cameroon 2016 237 0.49 3.03 0.2 0.64 0.72 0.55
Cote d’Ivoire 2016 246 0.52 3.33 0.23 0.69 0.71 0.59
Guinea 2013 96 0.47 2.71 0.03 0.5 1 0.48
(Conakry)
Ghana 2016 598 0.56 3.31 0.23 0.79 1 0.73
Mali 2016 111 0.48 3.23 0.35 0.76 0.79 0.63
Mauritania 2014 124 0.38 3.15 0.29 0.67 1 0.53
Nigeria 2014 368 0.5 2.54 0.05 0.55 1 0.52
Senegal 2014 429 0.5 3.19 0.16 0.66 1 0.6
Togo 2016 129 0.36 2.96 0.39 0.71 0.88 0.52
West Africa 2464 0.47 3.01 0.22 0.66 0.9 0.57
Africa 9632 0.42 2.77 0.22 0.62 0.91 0.51
Where credit constrainedij is the underlying probability that firm i in country j is

credit constrained which takes the value 1 if a firm that need external fund refused to
apply or was turned down and 0 if a firm that needed external funds had access to
credit. θfirm is the vector for firm-specific control variables, λc is the vector for
country-level control variables.
Competition is the indicator of bank competition measured using both structural
(CR) and Non-structural measures (Boone, H-statistics and Lerner index). If β > 0
more competition induces less credit constraints thus supports structural-performance
hypothesis. By contrast, β < 0 confirms the information hypothesis indicating that
competition hinders access to finance.
To control observable firm-level heterogeneity, the study includes age, size, top manager
experience and share of asset owned by large owner. Dummy variables capturing whether the
firm is manufacturing, service, subsidiary to other large firm/s, publically listed, privately held,
foreign owned and exporter are included. To capture variation in accounting standard, dummy
variable audited is included. We also control gender effect taking dummy variable 1 for female
manger, 0 otherwise.
Moreover, country-level variables correlated with banking competition and credit availabil-
ity are included as control variables. The level of general economic development and financial
sector development is captured using the logarithm of real GDP per capita and the ratio of
domestic credit to GDP respectively. In addition, macroeconomic conditions are
captured by the real growth and the inflation rate. Variables such as depth of credit
information and strength of legal rights that has big potential for countries variation in
determining firm’s access to credit are also included. Although the impact of foreign
owned banks on firm’s access to credit is ambitious, we also control the percentage of
the number of foreign owned banks to the number of the total banks in an Economy.
In investigating the implication of banking competition on firms’ credit availability,
controlling the level of countries institutional development is crucial. Therefore, we
include institutional development which is an average of control of corruption,
political stability and absence of violence/terrorism, regulatory quality and rule of
law. Variable measurement and definition is outlined in appendix I. Most of these
variables are also used by Beck et al. (2004), Brown et al. (2011), Love and Martínez
Pería (2015)and Leon (2015). Finally, In order to capture unobservable characteristics
shared by firms in the same sector and differences between countries, industry-fixed
effect and country fixed-effects are included in the estimation and we also include
time-dummy in the estimation to capture variations in survey time.
4.4 Hypothesis
The effect of competition on access to credit is ambiguous in the literature. Extant

literature concentrates around two competing views: the information hypothesis which
emphasizes relationship lending and the market power hypothesis which follows from
the Structure–Conduct–Performance approach (Chong et al. 2013). The information
hypothesis postulates that fiercer competition may make it more difficult for banks to
internalize the benefit of assisting opaque firms which in turn leads to less access to
credit. The benchmark of market power hypothesis is more competition in the banking
sector reduces the interest rate and hence increases the availability of credit to all
firms irrespective of their opacity (Carbó-Valverde et al. 2009). Increased competition
may lead to firms to get more access to bank credit in Africa where financial sector is
bank-based, and over all institutional development is weak. Therefore, we expect that
increased competition will lead to more credit availability, or access to credit. Our
hypothesis is in line with market power hypothesis.
Hypothesis 1 Banking competition alleviate financing obstacles in Africa.
The effect of bank competition on firms’ access to bank credit may occur in different ways.
Therefore, we need to investigate the effect from expressing demand to actually obtaining bank
loan. A more competitive banking system may result into banks providing banking services
like loan and advance and overdraft facilities at lower cost. This may exert a positive effect on
firms’ need for bank loan which also affect firms’ decision to apply for bank loan. Moreover,
under normal conditions, competitive pressure increase the probabilities of banks to accept
firms’ loan application. The more firms’ loan application is accepted by lenders (bank) the less
likelihood it is to report higher financing obstacles by the firm. Accordingly, we develop the
second hypothesis as follows:
Hypothesis 2 Banking competition positively affect firms’ need for external financing,
decision to apply for bank loan and banks decision to accept/deny firms’ loan application.
5 Results
5.1 Bank Competition and Firms Need for External Financing
Before estimating the main empirical model, we first investigate the determinants of the firms
need for credit. Table 5 presents the results from the probit model. The first column reports the
results of estimation without banking sector competition variables and the subsequent columns
presents the estimate result of the empirical model which includes the four competition
measures; CR3, Boone, H-statistic and Lerner index. The need for bank credit increases with
the top manager experience and decreases with the size of the firm. Firms managed by female
manager is more likely to need external financing. Firms that have access to other sources of
financing, such as firm that are subsidiaries of large firms and foreign owned firms desire less
bank credit.
The coefficients of banking competition measures; CR3, Boone, H-statistic and Lerner is
positive and statically significant at 1% level. The result consistently reveals that firms are
more likely to require bank credit in a more competitive banking system. When competitive
intensify banks reduce cost of lending through lowering lending rate. Low lending rate by
banks increases firms’ demand for bank loans. In addition, lower lending rate of banks may
affect the rate of lending of other lending institutions and the effect will expand to the general
credit market. As a result, firms’ need for external financing could increase.
Results from country-level control variables show that firms’ demand for bank loans is
more likely to increase with increase in the depth of credit information and institutional
development. However, this desire is less likely in countries with higher GDPpc and growth
rate. Similarly, the need for bank loans is negatively associated with the legal right protection
and financial sector development in a given country. Potential borrowers might be reluctant to
demand credit if they could lose collateral in case of bankruptcy and thus may prefer other
sources of financing (Leon 2015). Regarding exclusion restriction variables both sales on
credit and customer advances (WC) and construction are statically significant. The importance
of this variable is presented in the robustness test section.
5.2 Bank Competition and Credit Constraints
This section presents the results of the empirical test of the link between competition and credit
constraint. Table 6 presents the results of baseline empirical model. The coefficients of CR3,
Boone, H-statistic and Lerner are positive and statically significant at 1% level. The positive
coefficients of competition measures indicate that firms are more likely to be credit constrained
in a competitive banking system. In other words, banking competition worsens credit con-
straints in Africa. The result supports the information hypothesis. The average depth of credit
information for all countries included in this study is 2.47 from 10 which is extremely low and
Table 5 Determinants of the need for credit
168
Need None CR3 Boone H- statistic Lerner
ln(size) −0.065 (0.0157)*** −0.0646 (0.0157)*** −0.065 (0.0157)*** −0.0687 (0.0191)*** −0.0671 (0.0181)***
ln(age) −0.031 (0.0382) −0.0315 (0.0382) −0.031 (0.0382) −0.0453 (0.0396) −0.0373 (0.0412)
Ln(Exp) 0.0441 (0.0231)** 0.0440 (0.0231)** 0.0441 (0.0231)** 0.0626 (0.0186)** 0.0552 (0.019)***
Manufacture 0.0076 (0.0156) 0.0075 (0.0156) 0.0076 (0.0156) 0.0235 (0.0162) 0.0177 (0.0171)
Service 0.0461 (0.0336) 0.0460 (0.0336) 0.0461 (0.0336) 0.0639 (0.0343)* 0.067 (0.0338)**
Subsidiary −0.032 (0.0145)** −0.0319 (0.0145)** −0.032 (0.0145)** −0.0203 (0.0164) −0.0332 (0.0167)**
Pub.- Listed −0.02 (0.0288) −0.0198 (0.0288) −0.02 (0.0288) −0.0146 (0.0347) −0.0262 (0.0345)
Privately-held −0.007 (0.0266) −0.007 (0.0266) −0.007 (0.0266) −0.0122 (0.0314) −0.0252 (0.0317)
Large-own. −0.023 (0.0218) −0.0229 (0.0218) −0.023 (0.0218) −0.0208 (0.0228) −0.0066 (0.0154)
Domestic 0.0136 (0.0287) 0.0136 (0.0287) 0.0136 (0.0287) 0.00704 (0.0232) −0.0008 (0.0281)
Foreign owned −0.037 (0.027)* −0.0367 (0.027) −0.037 (0.027)* −0.0496 (0.0266)* −0.0514 (0.0291)*
Gov.- owned −0.089 (0.0762) −0.0887 (0.0762) −0.089 (0.0762) −0.0904 (0.0852) −0.0906 (0.0908)
Female 0.0353 (0.0174)** 0.0353 (0.0174) 0.0353 (0.0174)** 0.0421 (0.0188)** 0.0389 (0.0199)**
Exporter 0.0063 (0.0142) 0.0062 (0.0142) 0.0063 (0.0142) 0.0089 (0.0163) 0.0043 (0.0153)
Audited 0.0103 (0.0206) 0.0102 (0.0206) 0.0103 (0.0206) 0.0098 (0.0235) 0.0115 (0.0228)
Construction 0.258 (0.0262)*** 0.2583 (0.0262)*** 0.258 (0.0262)*** 0.2542 (0.0311)*** 0.2776 (0.0259)***
WC 0.0295 (0.022)** 0.0295 (0.022)** 0.0295 (0.022)** 0.0484 (0.0234)** 0.0385 (0.0239)*
Bank competition ___ 1.3292 (0.055)*** 8.6408 (0.3577)*** 1.2997 (0.0529)*** 0.7398 (0.0267)***
Legal rights −0.117 (0.006)**** −0.0198 (0.0034)*** 0.3692 (0.0155)*** 0.1304 (0.0056)*** 0.0194 (0.0029)***
Credit info. 0.0193 (0.0021)*** −0.0475 (0.0018)*** 0.0048 (0.0017)*** −0.1251 (0.0026)*** −0.0687 (0.0027)***
Foreign Bank 0.071 (0.0268)*** −0.9188 (0.049)*** −2.921 (0.1267)*** −1.4217 (0.0432)*** −0.0739 (0.0202)***
FSD −0.42 (0.0344)*** −1.1728 (0.0508)*** 1.355 (0.0746)*** −0.2135 (0.0468)*** −0.4557 (0.0393)***
Inst. Dev. 0.0562 (0.0153)*** 0.6909 (0.0298)*** 1.2524 (0.0511)*** 1.1601 (0.0377)*** 0.3785 (0.0214)***
Growth 1.0745 (0.2506)*** −11.011 (0.4814)*** −24.32 (0.9985)*** 11.713 (0.3748)*** 6.0484 (0.319)***
ln(GDPPC) −0.426 (0.0238)*** 0.0899 (0.0124)*** −1.185 (0.0532)*** 0.901 (0.0247)*** 0.6845 (0.0253)***
Inflation −0.914 (0.0653)*** −0.4035 (0.0579)*** 2.5097 (0.1234)*** 2.303 (0.1424)*** 0.6399 (0.0874)***
Time-dummy −0.032 (0.0156)** −0.2783 (0.0126)*** 0.7186 (0.0422)*** −0.6865 (0.0298)*** −0.1463 (0.0136)***
Industry FE Yes Yes Yes Yes Yes
Country FE Yes Yes Yes Yes Yes
No. Obs. 9632 9632 9632 8286 8425
Pseudo R2 0.1261 0.1281 0.1281 0.1265 0.1276
Number of clusters 27 27 27 20 21
The dependent variable is a dummy variable equal to 1 if the firm desires bank credit, 0 otherwise. Results using the probit model are reported. Definitions of variables are reported in
the Appendix. Inverse of CR3, Boone indicator and Lerner index are used in the table. Marginal effects is reported. Robust standard error are presented in parentheses and adjusted for
clustering at country- level. *, **and *** are significant at 10%, 5 and 1% level respectively
Table 6 Bank competition and credit constraints
Credit constraint None CR3 Boone H-stat Lerner
ln(size) −0.116 (0.0215)*** −0.116 (0.0215)*** −0.1158 (0.0215)*** −0.122 (0.0259)*** −0.119 (0.0245)***
ln(age) −0.044 (0.0359) −0.044 (0.0359) −0.0445 (0.0359) −0.056 (0.0368)* −0.052 (0.0371)*
Ln(Exp) 0.0235 (0.0325) 0.0235 (0.0325) 0.0235 (0.0325) 0.0346 (0.0335) 0.0278 (0.0334)
Manufacture −0.004 (0.0216) −0.004 (0.0216) −0.0044 (0.0216) 0.0196 (0.0168) 0.0085 (0.0217)
Service 0.0303 (0.0214) 0.0303 (0.0214)* 0.0303 (0.0214)* 0.0408 (0.0225)* 0.0361 (0.0225)*
Subsidiary −0.05 (0.0152)*** −0.05 (0.0152)*** −0.0496 (0.0152)*** −0.037 (0.0139)*** −0.054 (0.0184)***
Pub.- Listed −0.01 (0.0287) −0.01 (0.0287) −0.0098 (0.0287) −0.006 (0.0365) −0.005 (0.0307)
Privately-held 0.0293 (0.0245)** 0.0293 (0.0245)** 0.0293 (0.0245)** 0.0296 (0.0286)*** 0.0222 (0.0284)**
Large-own. −0.024 (0.0236) −0.024 (0.0236) −0.0244 (0.0236) −0.024 (0.0255) −0.011 (0.0197)
Domestic 0.0023 (0.0299) 0.0023 (0.0299) 0.0023 (0.0299) −0.003 (0.0316) −0.021 (0.0336)
Foreign owned 0.0102 (0.0309) 0.0102 (0.0309) 0.0102 (0.0309) 0.0024 (0.0337) −0.013 (0.0336)
Gov.- owned −0.054 (0.0752) −0.054 (0.0752) −0.0536 (0.0752) −0.031 (0.0897) −0.03 (0.0922)
Female 0.0377 (0.0177)** 0.0377 (0.0177)** 0.0377 (0.0177)** 0.0388 (0.0174)** 0.0379 (0.0184)**
Exporter −0.017 (0.0233)* −0.017 (0.0233)** −0.0166 (0.0233)** −0.014 (0.0261)* −0.015 (0.0253)*
Audited −0.049 (0.026)** −0.049 (0.026)* −0.0487 (0.026)* −0.046 (0.0295)* −0.044 (0.0289)*
Bank competition ___ 1.2922 (0.0543)*** 8.4004 (0.3531)*** 0.3692 (0.0895)*** 0.2334 (0.0492)***
Legal rights −0.042 (0.0061)*** 0.0524 (0.0032)*** 0.4306 (0.0147)*** 0.0756 (0.0092)*** 0.0424 (0.0031)***
Credit info. 0.0335 (0.003)*** −0.031 (0.0013)*** 0.0194 (0.0025)*** −0.068 (0.0043)*** −0.052 (0.0016)***
Foreign Bank −0.137 (0.0262)*** −1.1 (0.0383)*** −3.0462 (0.1143)*** −0.472 (0.0776)*** −0.058 (0.0206)***
FSD −0.578 (0.0348)*** −1.31 (0.0527)*** 1.1475 (0.0709)*** −0.573 (0.0638)*** −0.633 (0.05)***
Inst. Dev. 0.0886 (0.0166)*** 0.7057 (0.0317)*** 1.2515 (0.0526)*** 0.3623 (0.0596)*** 0.1306 (0.0225)***
Growth −4.514 (0.2772)*** −16.26 (0.4571)*** −29.204 (0.9587)*** 2.9789 (0.61)*** 1.5638 (0.3796)***
ln(GDPPC) −0.364 (0.0289)*** 0.1384 (0.0125)*** −1.1013 (0.0587)*** 0.6363 (0.034)*** 0.5913 (0.0242)***
Inflation −0.541 (0.0616)*** −0.045 (0.0581) 2.7876 (0.1327)*** 0.6768 (0.2015)*** 0.2167 (0.1038)**
Time-dummy 0.0951 (0.0148)*** −0.145 (0.0124)*** 0.8247 (0.0409)*** −0.21 (0.0472)*** −0.054 (0.0151)***
No. Obs. 9632 9632 9632 8286 8425
Pseudo R2 0.0995 0.0995 0.0995 0.0875 0.0866
The dependent variable is a dummy variable equal to 1 if a firm that need external fund refused to apply or was turned down and equal to 0 if a firm that needed external funds had access to
credit. Results using the probit model are reported. Definitions of variables are reported in the Appendix. Inverse of CR3, Boone indicator and Lerner index are used in the table. Marginal
effects is reported. Robust standard errors are presented in parentheses and adjusted for clustering at country- level. *, **and *** are significant at 10%, 5 and 1% level respectively
169
17 countries has zero score. This limited information may cause information asymmetry which
may result adverse selection, moral hazard and hold-up problems between lenders and
borrowers. Moreover, information asymmetry may impose financial frictions which
cause external financing more expensive. In the presence of information asymmetries,
banks and other financial markets might not necessarily facilitate the allocation of
financial resources. In Africa, due to poor information communication channels the
transmission of information is slow and mostly informal. In such situations, access to
credit for opaque borrowers can decrease when competition is strong. The result is
similar with the findings of Hoxha (2013) and Love and Martínez Pería (2015) and
againest to findings of Beck et al. (2004) and Leon (2015).
The result shows that credit constraint also depends on borrower-specific characteristic and
country specific factors. Firms engaged in service business and managed by females are more
likely to face credit constraints. Large firms that generate more profits for the purpose of
internal financing are less likely to be credit constrained. In Africa, small and medium
enterprise (considered an engine of growth) are facing big financing problem. Particularly,
the problem is more serious on privately held small and medium enterprise. Firms which are
subsidiary of other large firm has additional sources of credit and less likely to be credit
constrained. Aimed to promote export, exporters are financially supported by the government
and hence less likely to face financial challenges. Auditing practices of firms also affect access
to bank finance.
Regarding country-level variables, firms in countries with strong legal right protec-
tion are less likely to face credit constraints. We find a strong, positive and significant
relationship between higher proportion of share of foreign banks and availability of
credit indicating the importance of foreign banks in alleviating credit constraints in
Africa. Financial system development hinders credit constraints. The general economic
development (GDPpc) and growth reduces financing constraints. Negative and signif-
icant coefficients of depth of credit information support the baseline result competition
aggravate credit constraint (information hypothesis). In the initial stages, measures
taken by the government to tackle corruption, build rule of law and set better
regulatory qualities may face opposition from various bodies including funding insti-
tutions. This may result to complexities in obtaining credit in short run. This is more
likely to be true in Africa. Generally, firms’ access to finance in Africa is mainly
influenced by country-level factors than firm-specific characteristics.
5.3 Bank Competition and Firm’s Decision to Apply for Loan
Recent studies have shown that the low use of formal credit is largely explained by borrower
discouragement rather than by banks’ denial decisions (Leon 2015; Brown et al. 2011). Our
findings support this assertion in that 66% of firms with a need for external funds refused to
apply for bank loans. The data provides the possibility of investigating to what extent
the low incidence of bank credit in developing countries results to low credit demand
and/or supply-side constraints and the factors influencing both (Leon 2015). Question
K17 is used to investigate reasons for discouragement. The findings indicate that
30.9% firms are discouraged to apply for bank loans due to unfavorable interest rate.
Bank’s Lending rate in most of African countries is high. High collateral requirement
and complex application procedures are the next most important factors that discour-
age borrowers. Table 7 presents reasons for discouragement.
Table 7 Reasons for discouragement
Reasons for discouragement Freq. Percent
Interest rates were not favorable 1127 30.93

Collateral requirements were too high 785 21.55
Application procedures were complex 745 20.45
Did not think it would be approved 290 7.96
Size of loan and maturity were insufficient 122 3.35
Other 574 15.76
Total 3643 100
Borrower discouragement can be explained by many economic and non-economic factors

(Leon 2015). Banking competition can affect borrower’s decision to apply for a loan and the
demand for loans by reducing the costs of credit. Controlling firm-level and country-level
variables we investigate the impact of competition on firm’s decision to apply for loan. The
estimated result of probit model taking dummy variable Apply is presented in Table 8. The
coefficients associated with CR3, Boone, H-statistic and Lerner are positive and significant at
1% level. The result evidence that banking competition promote firm’s decision to apply for
bank loan. Firms in a competitive banking system are more likely to apply for bank loan as
compared to firms in a less competitive banking system. Competition exerts pressure on banks
to lower interest rate (the main source of borrower’s discouragement) and hence attract
borrowers to apply for bank loan. Inter-bank competition allows better banking service and
strengthens relationship lending.
The results suggest that large and audited firms are more likely to apply for bank loans.
Lenders evaluate creditworthiness capacity of their borrower based on audited financial
statements, hence borrowers keep records of audited financial statements before deciding to
apply for bank credit. In addition, experienced managers are more likely to apply for
bank loans. The lower propensity to apply for bank loan by government and foreign-
owned firms confirms our predictions, as these firms may have alternative financing
sources. Among 3643 discouraged firms 75% are privately held firms. In line with
this, the results show that privately held firms are less likely to apply for bank loan.
Like the previous estimation, all country-level control variables included in the
estimation have statistically significant effect on firm’s decision to apply bank loan.
Depth of credit information, foreign banks share, financial system development,
institutional development and economic growth are positively associated with firm’s
decision to apply for bank loan. Finally, firms’ decision to apply bank loan is mainly
affected by ownership structure of firms and country-level factors.
5.4 Bank Competition and Loan Application Approval/Rejection
Banking competition encourages firms’ decision to apply for bank loan. We further investigate
whether banking competition has an effect on loan application approval/rejection. The esti-
mated results presented in Table 9. The coefficient of CR3 and Boone indicator are is
positively and significant. It indicates firms loan application is more likely to accept or less
likely to reject when inter-bank competition is strong. In countries with low level of compe-
tition, a bank can easily turn down an application without costs but in competitive market the
choice to deny borrowers loan application implies the risk of losing long-term relationship
Table 8 Bank competition and loan application
172
Apply None CR3 Boone H-stat Lerner
ln(size) 0.0401 (0.0108)*** 0.0401 (0.0108)*** 0.0401 (0.0108)*** 0.0432 (0.0118)*** 0.0422 (0.012)***
ln(age) 0.0065 (0.0117) 0.0065 (0.0117) 0.0065 (0.0117) 0.0096 (0.0138) 0.0081 (0.0136)
Ln(Exp) 0.0376 (0.0105)*** 0.0376 (0.0105)*** 0.0376 (0.0105)*** 0.0447 (0.0115)*** 0.0425 (0.0118)***
Manufacture 0.0173 (0.0151) 0.0173 (0.0151) 0.0173 (0.01510 0.0112 (0.0144) 0.0171 (0.0178)
Service 0.0144 (0.0214) 0.0144 (0.0214) 0.0144 (0.0214) 0.0227 (0.0212) 0.0305 (0.0216)
Subsidiary 0.0029 (0.0152) 0.0029 (0.0152) 0.0029 (0.0152) 0.0067 (0.0167) 0.0094 (0.0172)
Pub.- listed −0.016 (0.0169) −0.0164 (0.0169) −0.0164 (0.0169) −0.002 (0.016) −0.015 (0.0175)
Privately-held −0.033 (0.0156)** −0.0331 (0.01560** −0.0331 (0.0156)** −0.032 (0.0174)* −0.037 (0.0172)**
Large-own. −0.013 (0.0139) −0.0132 (0.0139) −0.0132 (0.0139) −0.003 (0.013) −0.003 (0.0136)
Domestic 0.0176 (0.021) 0.0176 (0.021) 0.0176 (0.021) 0.0144 (0.0218) 0.0255 (0.0228)
Foreign owned −0.045 (0.0199)** −0.0453 (0.0199)** −0.0453 (0.0199)** −0.049 (0.0215)** −0.037 (0.0233)*
Gov.- owned −0.061 (0.0323)* −0.0608 (0.0323)* −0.0608 (0.0323)* −0.091 (0.0277)*** −0.09 (0.0304)***
Female −0.000 (0.0101) −0.0007 (0.0101) −0.0007 (0.0101) 0.0055 (0.0111) 0.0011 (0.0112)
Exporter 0.0214 (0.0155) 0.0214 (0.0155) 0.0214 (0.01550 0.0204 (0.0163) 0.0177 (0.0152)
Audited 0.063 (0.0117)*** 0.063 (0.0117)*** 0.063 (0.0117)*** 0.0611 (0.0122)*** 0.0609 (0.0122)***
WC 0.0378 (0.0128)*** 0.0378 (0.0128)*** 0.0378 (0.0128)*** 0.0417 (0.0132)*** 0.0436 (0.0124)***
Purchase Cr. −0.21 (0.0205)*** −0.21 (0.0205)*** −0.21 (0.0205)*** −0.218 (0.0223)*** −0.228 (0.0206)***
Bank competition 0.2873 (0.0441)*** 1.8678 (0.2865)*** 0.6157 (0.0476)*** 0.3933 (0.0278)***
Legal rights −0.058 (0.0049)*** −0.037 (0.0031)*** 0.0471 (0.0126)*** 0.0575 (0.0042)*** −0.005 (0.0016)***
Credit info. 0.0054 (0.0026)** −0.009 (0.0014)*** 0.0023 (0.0022) −0.041 (0.0028)*** −0.014 (0.0016)***
Foreign Bank 0.1529 (0.01980*** −0.0611 (0.0327)* −0.4939 (0.0951)*** −0.761 (0.0426)*** 0.0278 (0.0151)*
FSD 0.1446 (0.0257)*** −0.0181 (0.0277) 0.5284 (0.0731)*** 0.2646 (0.027)*** 0.154 (0.0215)***
Inst. Dev. 0.0689 (0.0126)*** 0.2061 (0.0248)*** 0.3274 (0.0419)*** 0.6906 (0.0367)*** 0.2518 (0.0119)***
Growth 4.4199 (0.2688)*** 1.8074 (0.32)*** −1.0699 (0.7122) 7.1457 (0.5221)*** 4.8445 (0.3964)***
ln(GDPPC) −0.208 (0.0205)*** −0.0967 (0.0067)*** −0.3724 (0.0451)*** 0.171 (0.023)*** 0.0936 (0.0187)***
Inflation −0.361 (0.0298)*** −0.2505 (0.0356)*** 0.3792 (0.12)*** 1.1998 (0.1128)*** 0.3208 (0.0608)***
Time-dummy −0.147 (0.0079)*** −0.2007 (0.0093)*** 0.0148 (0.0285) −0.432 (0.0237)*** −0.151 (0.0067)***
No. Obs. 9632 9632 9632 8286 8425
Pseudo R2 0.1609 0.1609 0.1609 0.1712 0.1779
The dependent variable is a dummy variable equal to 1 if the firm with a need of credit decide to apply for a bank loan. Results using the probit model are reported. Definitions of
variables are reported in the Appendix. Inverse of CR3, Boone indicator and Lerner index are used in the table. Marginal effects is reported. Robust standard error are presented in
parentheses and adjusted for clustering at country- level. *, **and *** are significant at 10%, 5 and 1% level respectively
Table 9 Bank competition and loan application acceptation/rejection
Accepted None CR3 Boone Lerner
ln(size) 0.015 (0.0066)** 0.0126 (0.0057)** 0.0078 (0.0075)** 0.0012 (0.0012)**

ln(age) 0.0254 (0.0133)** 0.0202 (0.012)* 0.0108 (0.0128)* 0.0035 (0.0035)**
Ln(Exp) −0.025 (0.0129)** −0.0219 (0.0122)* −0.011 (0.0105)* −0.0039 (0.0038)***
Manufacture −0.007 (0.016) −0.0085 (0.0117) −0.006 (0.0085) −0.0040 (0.0039)**
Service 0.0261 (0.0132)** 0.0196 (0.0098)** 0.0115 (0.0119)** 0.0018 (0.0016)*
Subsidiary 0.0159 (0.0071)** 0.0145 (0.0068)** 0.0065 (0.0075)** 0.0023 (0.0019)**
Pub.- Listed −0.016 (0.0195) −0.0121 (0.0167) −0.007 (0.0114) −0.0019 (0.0023)
Privately-held 0.0035 (0.0083) 0.0052 (0.0066) 0.0018 (0.0043) 0.0001 (0.0007)
Large-own. −0.004 (0.0108) 0.0000 (0.0099) −0.0000 (0.0052) −0.0009 (0.0019)
Domestic −0.012 (0.0084) −0.0107 (0.0067)* −0.006 (0.0068)* −0.0031 (0.0028)**
Foreign owned −0.017 (0.0202) −0.0122 (0.0158) −0.009 (0.0137) −0.0077 (0.0122)
Gov.- owned 0.015 (0.0086)* 0.0118 (0.0073)* 0.007 (0.0079)* –
Female 0.0005 (0.0077) 0.0006 (0.0063) 0.0009 (0.0036) 0.0015 (0.0012)*
Exporter 0.0021 (0.0063) 0.0007 (0.0053) 0.0004 (0.0031) −0.0003 (0.0012)
Audited 0.0135 (0.0103)* 0.0125 (0.0085) 0.0067 (0.0065)* 0.0006 (0.0011)
Bank competition 0.089 (0.0412)** 0.1247 (0.0562)** −0.0756 (0.0477)***
Legal rights −0.0004 (0.0053) −0.0047 (0.0048) 0.0007 (0.0034) 0.0012 (0.0009)**
Credit info. −0.012 (0.005)** −0.0124 (0.0047)*** −0.009 (0.0053)*** −0.0017 (0.0011)***
Foreign Bank −0.099 (0.0353)*** −0.0955 (0.0353)*** −0.067 (0.0449)*** −0.0187 (0.016)**
FSD −0.032 (0.0689) −0.0677 (0.0592) −0.047 (0.0393) −0.0254 (0.0293)
Inst. Dev. 0.034 (0.0215)* 0.0527 (0.0246)** 0.011 (0.0164)** −0.0022 (0.0032)
Growth 0.3488 (0.3152) 0.0075 (0.2219) 0.0452 (0.2539) −0.0558 (0.0667)
ln(GDPPC) −0.008 (0.046) −0.0152 (0.0378) 0.0019 (0.0256) 0.0114 (0.0084)*
Inflation −0.172 (0.1716) −0.1851 (0.1449) −0.189 (0.1279) −0.1000 (0.0758)***
Time-dummy 0.2129 (0.0822)** 0.1616 (0.0808)** 0.3522 (0.1949)** 0.2840 (0.1049)***
Industry FE Yes Yes Yes Yes
Country FE Yes Yes Yes Yes
No. Obs. 1851 1851 1851 1589
Pseudo R2 0.3651 0.3707 0.3707 0.4437
Number of clusters 27 27 27 21
The dependent variable is a dummy variable equal to 1 if the firm applying for a loan has obtained a bank credit.
Results using the probit model are reported. Definitions of variables are reported in the Appendix. Inverse of
CR3, Boone indicator and Lerner index are used in the table. Only 20 countries have H-statistic data, this reduce
the observation significantly then we drop to report. Marginal effects is reported. Robust standard error are
presented in parentheses and adjusted for clustering at country- level. *, **and *** are significant at 10%, 5 and
1% level respectively. Number of observation varies under different specification due to unavailability of one or
more country-level variable(s)
benefits (Leon 2015). A higher Pseudo R2 indicates the importance of firm-level and country-
level variables included.
Large firms (expected to have good repaying capacity and reputation), old (may
have long-term relationship with banks) and subsidiaries (has alternative external
source of fund) are more likely to have their loan applications accepted by banks.
In addition, government owned and audited firms are also more likely to obtain bank
credit. Government owned firms have two special privilege - in the eye of lenders;
lending to government-owned firms is safe than privately-owned and other firms and
secondly due to political pressure and other special relationship, government owned
firms are favored to obtain loan from state-owned banks. As long as creditworthiness
of borrowers is mainly evaluated based on financial statements, accounting and
auditing practices of borrowers has significant influence on loan approval decision.
Domestically-owned firms are less likely to get approved their loan application by
banks. Regarding country-level control variables, while institutional development

positively affects loan approval decision, depth of credit information and higher
proportion foreign bank exert negative effect on approval decision.
6 Further Analysis
It would be interesting to see differential impact of bank competition on firm’s access

to finance based on size orage of the firm. Thus, we conduct further analysis based
on firm size and age. Table 10 presents the effect of bank competition on firm’s credit
constraint, need for bank loan, decision to apply and outcomes of loan application
taking interaction effect of firm size and age. CR3 and Boone indicator were consis-
tent in the previous estimations and all countries have these data. However, Boone is
a better measure of competition than CR3. Therefore, we use Boone indicator for this
particular analysis. The results indicate that small and medium firms are more likely
to report higher credit constraints thus their need for external financing is higher but
less likely to apply for bank loan because they are discouraged. Even if they apply, it
is quite unlikely to get approved by banks. The opposite is true for large firms.
Regarding age differences, young firms are more likely to face high level of credit
constraint and need for a bank loan. Beside low incidence of loan application by
young firms, banks decision to reject their loan application is high. Banks tend to
readily to accept loan application of mature firms than young and old firms. Our
further analysis is virtually similar to previous findings. Small and young firms are
facing high level of credit constraint and have low access to finance.
Table 10 Effect of bank competition on firm’s access to finance for African firms: further analysis by firm size
and age
Independent Dependent variables

variables
Credit constraint Need Apply Accepted
Competition (Boone) 9.6600 (0.3647)*** 10.7345 2.4771 (0.3068)*** 0.1123 (0.0515)***

(0.3895)***
Small 0.1087 (0,0283)*** 0.0395 (0.13)*** −0.0232 −0.0063
(0.007)*** (0.0069)***
Medium 0.0548 (0.0195)*** 0.0304 (0.0182)* −0.0124 (0.0163) −0.0089 (0.0093)
Large −0.0536 −0.0306 (0.0384) 0.0127 (0.0172) 0.0062 (0.0064)**
(0.0186)***
Young 0.0664 (0.0370)* 0.0271 (0.0387) −0.0159 (0.0137)* −0.0013
(0.0019)***
Matured 0.0225 (0.0132)* −0.0245 (0.038) −0.0064 (0.0067) 0.0013 (0.0025)*
Old −0.0225 (0.0131)* −0.0282 (0.0390) 0.0064 (0.066) −0.00137 (0.0025)
No obs. 9632 9632 9632 1851
Pseudo R2 0.0936 0.1020 0.1164 0.3780
Measurement of dependent variables is similar with previous sections. First, we regress small and medium and
young and matured and missed large and old firms from the regression. In the second regression, small and
young firms were missed variables. Results using the probit model are reported. Industry and country FE are
included in all estimations. Marginal effects is reported. Robust standard error are presented in parentheses and
adjusted for clustering at country- level. *, **and *** are significant at 10%, 5 and 1% level respectively
7 Specification Robustness Test
The measurement of credit constrains is only available for firms that desire bank credit. For
firms without a need for credit, we cannot determine whether or not they would have been
constrained if they had expresses a demand for external funds. A simple probit model is
therefore may not be valid due to sample selection issue (Leon 2015). Therefore, as proposed
by Van de Ven and Van Praag (1981) and applied by Leon (2015) we employ a probit model
with sample selection (PSS) model. The PSS estimates two probit equations (selection and
outcome equations) where error terms follow a bivariate normal distribution (Leon 2015). The
selection equation (need for credit) is completely observed but we have only a selected sample
for the outcome equation (credit constraint). Relevant exclusion variables have to affect the
need for external funds but not directly impact access to finance. Based on Leon (2015), we
used two variables the proportion of the value of sales paid after delivery by customers in the
previous year (the variable includes the need for funds for financing working capital) and
dummy variable equal to one if the firm submitted an application to obtain a construction
permit in the prior two years (approximating the willingness to invest). Exclusion variables are
very significant in affecting firms’ need for external financing (see Table 5). The relevance of
sample selection problem is tested through a Wald test. Under the null hypothesis, the PSS
model does not give more information than simple pooled probit model. It underlines probit
model is fitted.
To ensure robustness of the possible measurement error, we replace credit constrained (the
binary dependent variable) by financing obstacles (a polychomous dependent variable with
natural order). Based on work of Beck et al. (2004), we developed the following alternative
order probit econometric specification.
Financing obstacleij ¼ α þ βcompetition j þ γfirmij þ λc j ð7Þ
Where financing obstacle is the underlying probability that firm i in country j perceives
access to finance to be - 1(no obstacle), 2 (minor obstacle), 3 (moderate obstacle), 4
(major and very sever obstacle) to their growth and operation. α denotes the cuts in the
order probit model and others are similar as defined in the baseline empirical model
(see Eq. 6).Even if its subjected to personal biasedness (the drawback of Enterprise
Surveys dataset), this measure may allow as to see the depth of financing constrains
taking a wide range of alternatives. The result obtained from ordered probit model is
presented in Table 15 of the appendix. The major results are the same with the baseline
estimation. The coefficients of CR3 and Boone indicator are positive and significant at
1% level. The result shows that the higher level of bank competition, the higher
probability that a firm reports access to finance as a major and sever obstacle. The
result again support competition worsens financing obstacles in Africa, supporting the
information hypothesis. The coefficients of H-statistic and Lerner is positive; underline
similar conclusion like CR3 and Boone indicator, but insignificant at usual threshold.
Finally, to address the potential endogeneity bias arising from the possible reverse causality
between competition and access to finance we incorporate the instrumental approach. Unfor-
tunately, it is not easy to find relevant instruments that are available for large set of countries.
Moreover, among the potential sources of endogeneity (measurement error, reverse causation
or the omitted variable) the omitted variable issue is certainly most likely in our case (Leon
2015a) thus we focused our attention on it.
8 Conclusion and Policy Implications
Literature related to the effect of banking competition on access to finance is

ambiguous and a much-debated issue in economic literature and policy circles. Using
surveys on 9632 firms from 27 African countries, this article sheds light on this
debate. This paper uses both approaches of bank competition measures; Structural
(CR3) and non-structural (Boone indicator, H-statistic and Lerner index) which allow
to provide complete picture on the importance of competitiveness of banking system
on firms’ access to finance. Further, this study investigates the potential channels
through which bank competition may affect firms’ access to bank credit.
We find that banking competition worsens credit/ financing constraints in Africa.
This finding supports the information hypothesis. However, our further investigation
shows that bank competition positively affects firms’ need for external financing,
decision to apply for new line of bank credit and banks loan approval decision.
Our findings also show the importance of controlling for firm-specific and country-
level factors in investigating the effect of bank competition on access to finance.
Generally, access to credit in Africa is mainly affected by country-level factors as
compared to firm-specific characteristics. Although bank loan approval rate in Africa
is high, a large proportion of firms are discouraged to apply for bank loan due to
unfavorable interest rate, high collateral requirement and complex application proce-
dures. Low use of bank credit in Africa is mainly explained by low demand rather
than by higher rates of rejection.
The policy implication of this study directed towards both demand-side and supply-
side policy measures. Demand-side measures such as ensuring credit awareness, public
and private information sharing schemes may be important to motivate discouraged
borrowers and reduce information asymmetry. Supply-side measures that promote bank
modernization may be more beneficial to alleviate credit constraints. Bank moderni-
zation may help banks to reduce costs and minimize procedural complexities. Mod-
ernizing an IT infrastructure may be one important way to modernize banking
institutions. Moreover, efforts to promote overall institutional development such as
control of corruption and strengthening regulatory quality of the financial system may
be effective to tackle problems related with firms financing. In addition, our results
show that fast growing countries are less likely to report higher perceived financing
constraint than slow growing countries. Therefore, policies directed to economic
growth may be one way to alleviate financing constraints.
Finally, even though the net effect of competition on alleviating credit constraint is
negative, our further analysis to disentangle the effect, indicates that competition
exerts positive effect on firms demand for external financing, likelihood to apply for
bank credit and bank-loan approval decision. This two-side effect indicates further
studies are necessary in the area. Use of panel data may be more important to explain
bank competition and access to finance.
Acknowledgments The author is grateful to Isaboke Cyrus and Tusiimie Ivan for helpful suggestions and
editing. This paper is sponsored by National Natural Science Foundation of China (NSFC70972125).
Appendixes
Table 11 Variable description and data source
Variable name Measurement and definition Data source
Depended variable
Credit constraint Credit constraint is a dummy variable equal to 1 if a firm that need WBES
external fund refused to apply or was turned down and equal to 0 if a
firm that needed external funds had access to credit.
Financing Financing constraint is response to the question BHow problematic is WBES
constraint financing for the 1 (no obstacle), 2 (minor obstacle), 3 (moderate
obstacle) and 4 (major obstacle)
Need Dummy variable equal to 1 if a firm needed external funds in the last WBES
year
Apply Dummy variable equal to 1 if a firm needed external funds and applied WBES
for loans and 0 if the firm did not apply
Accepted Dummy variable equal to 1 if a firm applied for loans and received at WBES
least one line of credit and 0 if a firm applied but did not receive a line
of credit
Firm-level control variables
Firm size Number of permanent full-time employees WBES
Age Log of Age of the firms WBES
Experience Log of Experience in this sector that the top manager has WBES
Manufacturing Dummy variable that takes on the value 1 if firm is in the manufacturing WBES
industry, zero otherwise.
Service Dummy variable that takes on the value 1 if firm is in the service WBES
industry, zero otherwise.
Subsidiary Dummy variable equals to 1 if the firm is part of larger firm WBES
Exporter Dummy variable that takes on the value one if firm exports, zero WBES
otherwise. (d3c)
Publically listed Dummy variable equals to 1 if the firms is a publicly listed company WBES
Privately held Dummy variable equals to 1 if the firms is a limited liability company WBES
Largest owner Share of assets held by the largest owner WBES
Domestically Dummy variable equal to 1 if the firm is domestic and 0 otherwise WBES
owned
Foreign-owned Dummy variable that takes on the value 1if any foreign company or WBES
individual has a financial stake in the ownership of the firm, zero
otherwise
Dummy variable that takes on the value 1if any government agency or WBES
Government-- state body has a financial stake in the ownership of the firm, zero
owned otherwise.
Audited Dummy variable equals to 1 if the firm have its annual financial
statement checked and certified by an external auditor
Female Dummy variable that takes on the value 1if the manager is female 0 WBES
otherwise
WC The proportion of goods and service paid after delivery WBES
Construction Dummy variable equal to 1 if the firm submit an application to obtain WBES
construction related permit over the last two years
Measure of Competition variables (country-level)
Concentration Share of banking system assets held by the three largest banks GFDD
ratio(CR)
Boone The value of Boone indicator GFDD
H-statistics The value of H-statistics GFDD
Lerner The value of Lerner index GFDD
Country level control variable
Legal rights DB
Table 11 (continued)
Variable name Measurement and definition Data source
The strength of legal right index measures the degree to which collateral
and bankruptcy laws protect the right of borrowers and lenders (0–10)
Credit Depth of credit information index is a measure of the coverage, scope DB
information and accessibility of credit information available through either a
public credit registry or private credit bureau (0–10)
Foreign bank Percentage of the number of foreign owned banks to the number of the GFDD
share total banks in an Economy. A foreign bank is a bank where 50% or
more of its shares are owned by foreigners.
Financial Domestic credit to the private sector to GDP GFDD
development
(FSD)
Institutional The average composite index of control of corruption, political stability Kaufmann,
development and Absence of violence, regulatory quality and rule of law the value Daniel,
rages (−2.5 to 2.5). Aart Kraay
and
Massimo
Mastruzzi
(2010)
GDP per capita Log of GDP per capita (Constant USD) WDI
Inflation Annual change in the GDP deflator WDI
Growth Real growth of the GDP WDI
Time dummy 1 for countries surveyed in 2013 and 2014, 0 for 2015 and 2016 survey
Table 12 Correlation between main dependent variables and firm-level control variables
Financing constraint Credit constraint Size Age Experience Manufacturing Service Subsidiary Publically listed
Financing constraint 1
Credit constraint 0.219 1
Size −0.115 −0.204 1
Age −0.014 −0.075 0.247 1
Experience 0.002 −0.078 0.189 0.478 1
Manufacturing 0.009 −0.012 0.209 0.078 0.066 1
Service −0.022 0.005 −0.184 −0.042 −0.020 −0.514 1
Subsidiary −0.028 −0.055 0.205 0.124 0.036 −0.038 −0.036 1
Publically listed 0.030 −0.027 0.129 0.070 0.060 −0.006 −0.042 0.106 1
Privately held 0.060 0.108 −0.332 −0.165 −0.142 −0.018 0.040 −0.152 −0.387
Large owner 0.064 0.097 −0.287 −0.133 −0.131 −0.068 0.070 −0.119 −0.182
Domestic owned 0.046 0.015 −0.198 −0.043 0.003 −0.021 0.041 −0.160 −0.132
Foreign −0.040 −0.029 0.226 0.016 0.014 0.038 −0.040 0.119 0.114
Government −0.042 −0.025 0.102 0.071 −0.014 −0.008 −0.015 0.102 0.065
Export 0.016 0.059 −0.106 −0.031 −0.094 −0.046 0.051 −0.013 −0.030
Audited −0.074 −0.096 0.345 0.117 0.094 0.126 −0.064 0.087 0.063
Female manager −0.061 −0.146 0.325 0.118 0.128 0.050 −0.057 0.098 0.078
Privately held Large owner Domestic owned Foreign Government Export Audited Female manager
Financing constraint
Credit constraint
Size
Age
Experience
Manufacturing
Service
Subsidiary
Publically listed
Privately held 1
Large owner 0.415 1
Domestic owned 0.178 0.175 1
179
Table 12 (continued)
180
Privately held Large owner Domestic owned Foreign Government Export Audited Female manager
Foreign −0.175 −0.189 −0.80 1

Government −0.102 −0.121 −0.298 0.167 1
Export 0.064 0.064 0.023 −0.03 −0.009 1
Audited −0.220 −0.150 −0.211 0.230 0.110 −0.03 1
Female manager −0.185 −0.234 −0.083 0.119 0.021 −0.04 0.144 1
Table 13 Correlation between country-level variable
CR3 Boone H-stat Lerner Legal right Credit info. Foreign bank FSD Inst. Dev. Growth Inflation
In(GDPpc)
CR3 1
Boone 0.2103 1
H-stat 0.4093 0.0869 1
Lerner 0.0596 −0.2497 −0.4608 1
Legal right −0.459 0.0662 −0.562 −0.0465 1
Credit info. −0.166 −0.3954 0.3551 −0.1876 −0.5482 1
Foreign bank −0.181 0.3286 −0.0995 −0.4457 0.3343 −0.0096 1
FSD −0.0898 −0.1757 −0.2196 0.236 −0.3916 0.2314 −0.1774 1
Inst. Dev. −0.1858 −0.5103 −0.5429 0.4808 0.1624 0.1342 0.1744 0.4347 1
Growth −0.011 0.1565 −0.4006 0.4833 0.4318 −0.4756 −0.304 −0.3307 0.0562 1
In(GDPpc) −0.2903 −0.5502 0.0652 −0.1677 −0.4029 0.7963 0.003 0.566 0.3282 −0.5628 1
Inflation −0.043 −0.2485 0.3299 0.0734 −0.3553 0.4454 −0.0773 −0.2943 −0.1678 −0.2578 0.121 1
181
182
Table 14 Bank competition measures and other country-level variables
Country CR3 Boone H-stat Lerner Legal right Credit info Foreign bank FSD Int. dev. Growth GDPPC Inflation
Burundi 0.8385 0.1496 0.655 0.2784 2 0 0.5 0.1627 −1.1032 0.0459 222.31 0.1316
Djibouti 0.9194 0.7768 1 0 0.2893 −0.6435 0.0484 1449 0.0419
Ethiopia 0.7733 −0.081 0.604 0.4977 3 0 0 0.2068 −0.8209 0.1028 454.77 0.1096
Kenya 0.3733 −0.16 0.356 0.3227 7 0 0.305 0.2954 −0.7328 0.0455 1043.1 0.0938
Tanzania 0.5168 −0.124 0.387 0.2438 5 0 0.67 0.13 −0.429 0.0514 754.39 0.1074
Uganda 0.5287 −0.055 0.412 0.37 6 0 0.83 0.1368 −0.5823 0.0383 647.72 0.2171
East Africa 0.6583 0.0843 0.4828 0.3425 4 0 0.3842 0.2035 −0.7186 0.0554 761.89 0.1169
Egypt 0.5874 −0.109 0.732 0.2667 2 8 0.54 0.2769 −0.7603 0.0219 2658.8 0.1823
Morocco 0.6896 −0.036 0.522 0.2503 2 6 0.36 0.7164 −0.3105 0.0301 3014.7 0.0037
Sudan 0.804 −0.043 0.658 0.1812 3 0 0.21 0.1204 −1.6146 0.0052 1715 0.3488
Tunisia 0.417 −0.073 0.197 0.4241 3 4 0.47 0.7611 −0.2467 0.04 4129.4 0.049
North Africa 0.6245 −0.066 0.5273 0.2806 2.5 4.5 0.395 0.4687 −0.733 0.0243 2879.5 0.1459
D.R. Congo 0.4882 0.2032 0.563 0.1649 6 0 0.83 0.0513 −1.6245 0.0716 334.35 0.0749
Lesotho 0.9829 0.0017 5 5 0.2074 −0.1985 0.0161 1370.3 0.0381
Madagascar 0.9358 0.0144 0.2097 2 0 1 0.1102 −0.7581 0.0303 409.31 0.0549
Malawi 0.896 −0.088 0.133 5 0 0.25 0.177 −0.3952 0.0189 482.96 0.1766
Namibia 0.8546 0.031 5 6 0.43 0.483 0.35934 0.0565 5608.6 0.0872
Swaziland 0.834 −0.244 0.404 0.224 4 6 0.6 0.2044 −0.5681 0.0187 4057.3 0.058
Zimbabwe 0.6279 −0.082 5 5 0.345 0.3014 −1.2001 0.0047 814.56 0.0109
Southern Africa 0.8028 −0.023 0.3667 0.1996 4.571 3.143 0.4936 0.2192 −0.6265 0.031 1868.2 0.0715
Benin 0.8564 0.0077 0.711 0.2765 6 0 0.89 0.2264 −0.3481 0.0209 804.72 0.0008
Cameron 0.5934 0.0132 0.564 0.2276 6 1 0.73 0.1483 −0.9351 0.0577 1303.6 0.0027
Cote d’Ivoire 0.5617 −0.086 0.5563 0.1888 6 0 0.71 0.1844 −0.5848 0.0916 1496.2 0.0182
Guinea (Conakry) 1 −0.066 6 0 0 0.0585 −0.9129 0.001 439.87 0.0782
Ghana 0.4054 −0.128 0.134 0.4324 7 6 0.63 0.1564 0.08075 0.0929 1570 0.1521
Mali 0.9156 −0.037 0.1757 0.2093 6 0 0.67 0.227 −0.7972 0.0596 720.81 0.0276
Mauritania 0.7232 −0.006 0.0779 0.4683 2 0 0.38 0.2495 −0.8993 0.0609 1316.3 0.0301
Nigeria 0.4005 −0.113 0.592 0.1695 6 6 0.28 0.1259 −1.1354 0.0539 2448.9 0.0587
Senegal 0.631 −0.061 0.461 0.298 6 0 0.83 0.3268 −0.1678 0.0349 998.48 −0.025
Togo 0.8541 0.0209 0.2178 6 0 0.085 0.3215 −0.7389 0.0537 553.86 0.0353
West Africa 0.6941 −0.045 0.409 0.2765 5.7 1.3 0.5205 0.2025 −0.6439 0.0527 1165.3 0.0379
Africa 0.7135 −0.037 0.4351 0.2654 4.631 2.478 0.4813 0.2611 −0.6591 0.0402 1716.9 0.0734
All the data in the table is one year before the survey made for each year. Year of survey for respective country is give Table 4. The empty spaces are for the data not available
Table 15 Bank competition and perceived financial constraints
Financing obstacle None CR3 Boone H-stat Lerner
ln(size) −0.22 (0.0278)*** −0.22 (0.0278)*** −0.2197 (0.0278)*** −0.2223 (0.031)*** −0.2251 (0.0299)***
ln(age) 0.0196 (0.097) 0.0196 (0.097) 0.0196 (0.097) 0.0295 (0.1116) 0.0285 (0.1108)
Ln(Exp) 0.1207 (0.0579)** 0.1207 (0.0579)*** 0.1207 (0.0579)** 0.133 (0.0652)** 0.1347 (0.066)**
Manufacture 0.0807 (0.0449)* 0.0807 (0.0449) 0.0807 (0.0449)* 0.1051 (0.0445)* 0.0993 (0.0459)**
Service 0.1118 (0.0388)*** 0.1118 (0.0388)*** 0.1118 (0.0388)*** 0.0939 (0.0434)** 0.109 (0.0393)***
Subsidiary −0.032 (0.0374) −0.032 (0.0374) −0.0316 (0.0374) −0.0121 (0.0424) −0.0116 (0.0428)
Pub.- Listed 0.1474 (0.09)* 0.1474 (0.09)* 0.1474 (0.09)* 0.1862 (0.0711)*** 0.1148 (0.084)
Privately-held 0.1515 (0.0509)*** 0.1515 (0.0509)*** 0.1515 (0.0509)*** 0.1559 (0.0528)*** 0.1356 (0.052)***
Large-own. −0.096 (0.0414)** −0.096 (0.0414)** −0.0959 (0.0414)** −0.0942 (0.0409**) −0.0987 (0.0417)**
Domestic 0.0598 (0.0926) 0.0598 (0.0926) 0.0598 (0.0926) −0.0061 (0.0918) 0.016 (0.1024)
Foreign owned −0.095 (0.089) −0.095 (0.089) −0.0947 (0.089) −0.1481 (0.0916)* −0.1219 (0.0993)
Gov.- owned −0.061 (0.0954) −0.061 (0.0954) −0.0609 (0.0954) −0.0586 (0.0984) −0.054 (0.1059)
Female 0.0072 (0.0446) 0.0072 (0.0446) 0.0072 (0.0446) 0.0196 (0.0478) −0.0067 (0.0492)
Exporter 0.0131 (0.0402) 0.0131 (0.0402) 0.0131 (0.0402) −0.0022 (0.0417) 0.0072 (0.0431)
Audited 0.0015 (0.0384) 0.0015 (0.0384) 0.0015 (0.0384) 0.0032 (0.042) −0.0095 (0.0463)
Bank competition 1.3054 (0.1391)*** 8.4862 (0.9042)*** 0.2003 (0.1975) 0.1535 (0.1164)
Legal rights −0.015 (0.0197) 0.0804 (0.0113)*** 0.4625 (0.0338)*** −0.0522 (0.0189)*** −0.0717 (0.0052)***
Credit info. 0.0436 (0.0066)*** −0.022 (0.0042)*** 0.0294 (0.0055)*** −0.0661 (0.0104)*** −0.0572 (0.0048)***
Foreign Bank −1.324 (0.0887)*** −2.296 (0.0705)*** −4.2622 (0.2544)*** 0.0573 (0.2015) 0.3452 (0.0565)***
FSD −1.694 (0.0882)*** −2.433 (0.0803)*** 0.05 (0.2451) −0.7958 (0.0855)*** −0.8382 (0.0487)***
Inst. Dev. 1.0167 (0.0488)*** 1.64 (0.0524)*** 2.1914 (0.102)*** −0.0666 (0.1613) −0.2217 (0.0637)***
Growth −15.93 (1.1489)*** −27.79 (0.956)*** −40.868 (2.0418)*** 1.3721 (1.8881) 0.5825 (1.2603)
ln(GDPPC) −1.195 (0.059)*** −0.688 (0.0287)*** −1.9404 (0.1341)*** −0.5625 (0.0891)*** −0.5771 (0.0779)***
Inflation −2.094 (0.1079)*** −1.592 (0.0859)*** 1.2686 (0.3037)*** −2.9367 (0.4406)*** −3.2113 (0.2132)***
Time-dummy 0.4973 (0.0288)*** 0.2552 (0.0416)*** 1.2343 (0.0793)*** −0.0499 (0.1036) 0.0399 (0.032)
No. Obs. 9632 9632 9632 8286 8425
Pseudo R2 0.0469 0.0469 0.0469 0.0449 0.047
The dependent variable ‘access to finance’ is a polychotomous variable with natural order based on the response to the question BHow problematic is financing for the operation and
growth of your business?^ Answers vary between 1 (no obstacle), 2 (minor obstacle), 3 (moderate obstacle), and 4 (major obstacle, including very sever obstacle), the level of firms
access to finance is decrease no obstacle to major obstacle. Inverse of CR3, Boone indicator and Lerner index are used in the table. Marginal effects is reported. Robust standard error
are presented in parentheses and adjusted for clustering at country- level. *, **and *** are significant at 10%, 5 and 1% level respectively
183
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Bank Competition and Access to Finance:

Evidence from African Countries

Misraku Molla Ayalew & Zhang Xianzhi

Journal of Industry, Competition and

J Ind Compet Trade (2019) 19:155-184

Bank Competition and Access to Finance: Evidence

Misraku Molla Ayalew 1 & Zhang Xianzhi 2

Received: 9 February 2018 / Revised: 8 May 2018

Abstract Whether competition helps or hinders firms’ access to finance is a much-debated

Keywords Access to finance . Africa . Banking competition . Credit constraints . Discourage

JEL Classification D22 . G20 . L11 . O55

* Misraku Molla Ayalew

2.1 Banking Competition Measures

2.2 Banking Competition and Access to Finance

4 Measurement, Methodology and Hypothesis

4.1 Measuring Banking Competition

CRkt¼ ∑ni¼1 Si ð1Þ

LnðRevit Þ ¼ α þ ∑LL¼1 βlLnðWl; itÞ þ ∑KK¼1 ðγkZk; it þ μi þ εit ð2Þ

Table 1 Summary statistics

Variable Obs. Mean Std. Dev. Min Max

Definitions and sources of the variables are provided in Appendix

H‐statistics ¼ ∑3l¼1 βl ð3Þ

4.2 Measuring Access to Credit

Table 2 Outcomes of loan application

Outcome of loan applications Freq. Percent Cum.

Application was approved in full 1667 88.62 88.62

4.3 Empirical Methodology

Table 3 Financing obstacles

Financing obstacles Freq. Percent Cum.

No obstacle 2325 24.14 24.14

Table 4 Access to finance

Country Survey No. Credit Financing Apply Need Accepted Discouraged

Burundi 2014 144 0.35 2.84 0.39 0.74 1 0.57

Where credit constrainedij is the underlying probability that firm i in country j is

The effect of competition on access to credit is ambiguous in the literature. Extant

Hypothesis 1 Banking competition alleviate financing obstacles in Africa.

5.1 Bank Competition and Firms Need for External Financing

5.2 Bank Competition and Credit Constraints

Need None CR3 Boone H- statistic Lerner

Credit constraint None CR3 Boone H-stat Lerner

5.3 Bank Competition and Firm’s Decision to Apply for Loan

Table 7 Reasons for discouragement

Reasons for discouragement Freq. Percent

Interest rates were not favorable 1127 30.93

Borrower discouragement can be explained by many economic and non-economic factors

5.4 Bank Competition and Loan Application Approval/Rejection

Apply None CR3 Boone H-stat Lerner

Table 9 Bank competition and loan application acceptation/rejection

Accepted None CR3 Boone Lerner

ln(size) 0.015 (0.0066)** 0.0126 (0.0057)** 0.0078 (0.0075)** 0.0012 (0.0012)**

banks. Regarding country-level control variables, while institutional development

It would be interesting to see differential impact of bank competition on firm’s access

Independent Dependent variables

Competition (Boone) 9.6600 (0.3647)*** 10.7345 2.4771 (0.3068)*** 0.1123 (0.0515)***

7 Specification Robustness Test

8 Conclusion and Policy Implications

Literature related to the effect of banking competition on access to finance is

Table 11 Variable description and data source

Variable name Measurement and definition Data source

Variable name Measurement and definition Data source

Foreign −0.175 −0.189 −0.80 1

Table 14 Bank competition measures and other country-level variables

Financing obstacle None CR3 Boone H-stat Lerner

ln(size) 0.015 (0.0066) 0.0126 (0.0057) 0.0078 (0.0075) 0.0012 (0.0012)

Competition (Boone) 9.6600 (0.3647)* 10.7345 2.4771 (0.3068)* 0.1123 (0.0515)***