Does bank competition alleviate credit constraints in developing countries?

Whether competition helps or hinders firms' access to finance is in itself a much debated question in the economic literature and in policy circles, especially in the developing world. This paper considers the consequences of bank competition on credit constraints using firm level data covering 70 developing and emerging countries. In addition to the classical concentration measure, competition is assessed by computing three non-structural measures (Lerner index, Boone indicator, and H-statistic). The results show that bank competition alleviates credit constraints, while bank concentration measure is not a robust predictor of a firm's access to finance. Findings highlight that bank competition not only leads to less severe loan approval decisions but also reduces borrowers' discouragement. In addition, a secondary result of this paper documents that banking competition enhances credit availability more by reducing prices than by increasing relationship lending.