Bank Financing for SMEs – Lessons from the Literature

This paper surveys the recent literature on the relationship between SMEs, financial deepening and economic development. While a large SME sector is not associated with faster economic growth or poverty alleviation, financial deepening can have a pro-growth and pro-poor impact by alleviating SMEs’ financing constraints, enabling firm entry and entrepreneurship, and better resource allocation. It is important to differentiate between different segments of the SME population, most critically between subsistence micro entrepreneurs and transformational entrepreneurs. This paper also discusses the importance of market structure, competition and regulations for SMEs and their access to finance over the business cycle and during crises.