Local Bank, Digital Financial Inclusion and SME Financing Constraints: Empirical Evidence from China

This paper investigates the impact of local banks and digital financial inclusion on Small and Medium-sized Enterprise (SME) financing constraints. Using data from Chinese SMEs for the period 2007–2017, our robust results find that (1) SMEs’ financing constraints are negatively associated with the proportion of local bank branches and the degree of digital financial inclusion; (2) the effect of local banks is more pronounced for firms which are small, transparent, and located in the regions less dependent on bank credit; and (3) local bank branches and digital financial inclusion have a substitution effect on alleviating SMEs’ financial constraints. The findings shed light on how digital finance technologies could influence traditional SME-bank relationships and have important policy and managerial implications.