The Impact of Corruption on SMEs’ Access to Finance : Evidence Using Firm-Level Survey Data fromDeveloping Countries

The present paper estimates the impact of bureaucratic corruption on access to finance ofsmall and medium-size enterprises in 114 developing countries. Corruption can hurt small and medium-sizeenterprises’ access to finance by lowering profits, increasing credit demand, increasing bankruptcy chances,creating uncertainty about the firm’s future profit, and exacerbating the asymmetric information problem betweenborrowers and lenders. Consistent with this view, the findings show a large adverse effect of higher corruption onsmall and medium-size enterprises’ access to finance. An increase in corruption from its smallest to highest valueincreases the likelihood of small and medium-size enterprises being financially constrained from 6.9 to 10.9percentage points. The analysis uncovers several heterogeneities in the corruption-finance relationship. Forinstance, the adverse effect of corruption on access to finance is much less in countries where financialinstitutions protect the rights of borrowers and lenders are stronger, laws provide for better credit information, andcredit bureaus exist. The paper argues that these heterogeneities derive from the specific ways in whichcorruption impacts access to finance. Thus, they help to raise confidence against endogeneity concerns about the mainresults. Other heterogeneities uncovered suggest that corruption is more harmful to firms more that, absentcorruption, are known to enjoy better access to finance, such as male versus female owned firms, relatively largefirms, and better performing firms. The results have important policy implications for the growth of small andmedium-size enterprises in the developing world.