Access to Finance for Enterprises

This assignment delves into the critical issue of access to finance for enterprises, specifically focusing on bank lending to Small and Medium Enterprises (SMEs). It presents an analytical report that investigates the current state of bank lending to SMEs in various regions. The report draws upon relevant surveys conducted by institutions like the World Bank and the Union of Arab Banks, analyzing trends, challenges, and policy implications affecting SME financing. Quantitative data is used to understand patterns in lending behavior and identify factors influencing access to credit for businesses.

Case Study

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 The Demand and Supply of loan using BLS and SAFE surveys..........................................1
1.2 Theories related to demand and supply of loans...................................................................3
1.3 How close are the institutional decision makers and
the fund receivers from the theory.............................................................................................4
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

Illustration Index
Illustration 1: Demand and supply curve.........................................................................................4
Illustration 2: Illustration 1: Demand and supply curve with movements.......................................5
Illustration 3: Impact of changes......................................................................................................6

INTRODUCTION
The financial crisis of 2008 has affected the economy of many European countries. The
banks have made their policies mode stringent and the supply of credit has also reduced in the
Europe. The cost and availability of credit have been drastically changed. This has affected the
supply as-well-as demand of loans in many countries. The report contains BLS (Bank Lending
Survey) and SAFE (Survey on the Access to Finance of Enterprises) to critically evaluate the
demand and supply of loans in the Europe Union (EU). These surveys are done by European
Central Bank (ECB) and European Commission (EC) together and were initiated in 2009. It is
conducted twice in a year and it covers all small, micro, medium and large firms (BLS demand
and supply, 2016). It provides invaluable data regarding demand and credit conditions of all EU
countries. Along with this, the various institutional decision makers and fund receivers have been
included in the research report. The implication of their decisions and their relation with the
demand and supply have also been evaluated.
TASK 1
1.1 The Demand and Supply of loan using BLS and SAFE surveys
In order to understand the monetary policy of European Union, BLS (Bank Lending
Survey) was established. The BLS is commonly used to analyse the availability of credit,
demand and supply pressures while SAFE covers these aspects from the firms perspective.
These two survey have helped the European Union to come out of the financial crisis of 2008 as
many nations have taken important decisions on the basis of that (Ivashina and Scharfstein,
2010). Both of these surveys provide essential details which can be used by the government to
control the imbalance in the market. This unwanted imbalance could prove fatal for any nation as
a result it cannot be ignored.
BLS perspective: The survey points out that the demand of credit has dropped after the
crisis and has slowed down the development of credit. It has included more than 141 banks in the
survey and all are from European Union. The demand for credit remained negative in the early
2010 and remained the same for a longer period of time (Rocha and et.al, 2011). The reason
behind this was uncertainty in the economic environment and contraction in economic activity.
The demand considerably rose in 2015. The low interest rates has helped the demand to rise. The
supply was low because of tightened credit policies adopted by the banks. But countries like
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Italy and France have eased their policies while others still have tightened credit policies (Bassett
and et.al, 2014). After 2015, credit standards have been eased by the banks and the supply of
loans has improved. The BLS survey has pointed out that the supply has been affected because
of various factors like credit standards, terms and conditions for credit etc. Credit standards are
the guidelines that are formed by the banks before giving loans to any party (Christie, 2013).
While terms and conditions for credit include interest rates, maturity and collateral security
which have been agreed by the borrower and the bank. According to Euro banks there has been
significant rise in the demand of customer credit, household credit, SME and other corporate
loans (Kremp. and Sevestre, 2013). The rejection rate has also been reduced. Rejection rate is the
rejection of loan applications by the banks. This has given a positive sign that the economy has
been recovering well.
SAFE perspective: SAFE survey does not provide information about the gap between
demand and supply. It only evaluates the change that is happening. To capture the changes in
demand and supply, SAFE asks the firms to assess their external financing need on the basis of
trade credit, bank loans, credit lines, credit overdraft, equity investments and debt security
(Kraemer-Eis and Lang, 2012). This survey revealed that need of finance has increased in the
Euro area. While the equity and debt has not shown much increase. The need of bank loans has
been confirmed by lending banks of EU and have reported rise in the credit demand in the
European countries. The rise in the demand is a result of ease in the credit standards by the
lending banks (Hannigan, 2015). This has resulted in the improvement of credit supply which is
needed by Euro area based enterprises. Both BLS and SAFE use bank lending gap to evaluate
the changes in the market.
The BLS noticed that the lending gap increased in the year 2010 and 2011. While the
SAFE has measured it in a more volatile manner. The lending gap increased because of the
demand of loans rose while their was shortage of availability in the market (Schouten and et.al,
2012). This gap gradually decreased in 2012 indicating the improvement in the availability of
bank loans. In 2016, BLS noticed change in the credit standards and demand for credit. The
banks have continued their support to enterprises. As a result the supply has also increased.
Banks has taken many steps to enhance risk taking capacity and bring changes in the lending
policies. The banks has been using the traditional bank lending channels and by incorporating
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diversification on their asset allocation (Kwaak and et.al., 2016). Few steps has been taken up by
the banks to increase the supply of loans in the Euro market:
They have resorted to diversification of finance and introducing better allocation of risks in their
business. This has given boost to capital market and the demand of the credit has also increased.
The schemes like credit guarantee and securitisation has improved the banks to overcome market
failure and their balance sheet has also improved (Schouten and et.al, 2011). After the financial
crisis, all the European banks adopted to stringent rules and policies regarding loans. It was very
difficult for an enterprise to avail credit as the standards set by the banks were difficult to comply
with. But now-a-days, banks have eased their policies because the market has recovered from the
period of crisis. This has been a favourable situation for the European Union because it will
boost their economy and improve the pace of recovery. The banks would also ensure all the
important aspects before granting a loan to any individual, SME or a corporate firm.
1.2 Theories related to demand and supply of loans
The theory which is related to the demand and supply of credit in the European market:
Loan-able Funds Theory: This theory asserts that the interest rate is determined by the
equilibrium between the demand and supply of loan funds available in the market (Loan-able
funds Market, 2016). Loans are usually demanded by business firms, consumers, government
and hoardings. The supply of loans are furnished from the sources like savings, bank credit and
disinvestments (Bańkowska and et.al, 2015). The demand of loan funds changes with the interest
rates . Business will be profitable if they invest in capital goods when interest rate is low. The
total supply of credit will be higher if the rate of interest is high.
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The low cost of loans gives more opportunities for the people to borrow at a cheaper rate.
The supply curve moves in upward direction from left to right. It slope in the upward direction as
a higher interest rates gives the individuals more opportunities to get high returns and they save
more money (Ferrando and et.al., 2012). The point at which the supply and demand curve
intersects in knowns as equilibrium. At this stage the loan amount demanded is exactly same as
the amount supplied. According to the case study, this balance was disturbed during the Great
Depression period in UK and Europe. After the crisis the banks became reluctant and the supply
of the credit decreased to a great extent in the market. As a result the equilibrium was disturbed.
There was more demand than the supply and the interest rate rose (Kremp. and Sevestre, 2013).
The Classical version of loanable funds theory believes that the interest rate changes in the
market bring the equilibrium in place. The consumption is matched with the investment. The
demand of loans comes from different sources:
 Government borrowings
 Foreign borrowings
 Borrowings by firms
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Illustration 1: Demand and supply curve
(Source: Loan-able theory, 2016)

 Borrowings by local people
The supply of loans in the Euro market comes from:
 Personal and corporate savings
 Surplus of government
 Savings by foreigners
As the rate of interest rises, the investments and spendings reduces. For a business firm,
High interest rates would mean that they have to spend more. So the demand of loan decreases
with the increase in interest rates. In the Financial crisis in Europe the recession was very high.
lot of firms, consumers as well as banks were indebted. As a result the spending dropped and the
savings of people increased (Unlocking lending in Europe, 2014). This gave rise to huge problem
in Europe. Furthermore, the government of many European countries had to cut interest rates.
But the banks did not pass this to the consumers. The credit policies was also tight and it was
very difficult to get loans from the bank as the banks had less liquidity. The did not want to give
loans as it will cause cash crunch situation for them. Th bond yield also increased and people
began to panic more because of it. To resolve this issue the government increased the taxes and
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Illustration 2: Illustration 1: Demand and supply curve with movements
(Source: Loan-able theory, 2016)

had to cut down their expenses (Euro area bank lending survey, 2016). This caused the
equilibrium between the demand and supply curve to move from its original position. But as
soon as the Europe is coming out and recovering from the great depression period this
equilibrium is getting back to the original position. The banks have also reduced the strictness in
their credit policy. The demand for loan is still high and many SME prefer bank loans to finance
themselves (BLS demand and supply, 2016). As a result the supply of funds is also getting better
in many European countries. Many financial institutions and banks has included trade guarantee
and securitisation in their credit policies to ensure such incidents does not happen again.
1.3 How close are the institutional decision makers and
the fund receivers from the theory
The institutional decision makers at the time of financial crisis were government, banks,
financial institutions and the central bank of various nations. They had to take major decisions
for the nation in order to bring it out of the crisis. The fund receivers were local people, banks,
SME and firms. They had to face the major problems and consequences of the decisions taken up
by the institutional investors (How EU decisions are made, 2015). Both of these are closely
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Illustration 3: Impact of changes
(Source: Loan-able theory, 2016)

connected to the demand and supply theory. The decision of government and banks had major
influence on the credit availability in the nation. Banks decided not to give credit because of their
cash crunch situation and this reduced the supply of loan in the market. Furthermore, government
reduced the interest rates and brought new changes in the market. The demand of credit was still
high as the corporate and local people needed money (Christie, 2013). But they could not get
loans from the market. All of these situations gave rise to imbalance in the demand and supply.
The equilibrium shifted from its original position. This situation has been discussed in the Loan-
able theory which depicts the changes in the market. The institutional investors and fund
receivers are the ones which gave rise to this situation (Ivashina and Scharfstein, 2010). Initially
when the banks refused to give credit at that time the demand and supply were in equilibrium.
But after that the demand was higher than the supply. There was shortage of supply as the
standards laid down by the bank were too stringent. This situation began to improve as the
economy began to recover from the financial crisis of 2008. The demand and supply began to
shift back to their equilibrium position (Hannigan, 2015). It was because the bank in all
European nations began to ease their credit policies and terms. The year 2016 noticed the
reduction in rejection rates by banks as well. All this improved the situation and the balance
started to maintain again. So institutional investors are the people who give rise to the change in
equilibrium as they possess the power to take important decisions relating to the market.
Furthermore, this brings changes in the fund receivers judgement as they have to adapt to the
changes brought by the decision makers in the market (Bańkowska and et.al, 2015). Even if the
fund receivers does something out of the ordinary it will also cause the equilibrium to shift. The
balance has to be maintained by the both the parties to ensure proper working of the market. This
close relationship and interdependence between both the parties decide the operations of the
market (Ferrando and et.al., 2012). A sudden change in any one of them would cause changes in
the overall market. It would be better for institutional investors to keep a track of fund receivers
and the impact they would have due to the decisions. If both of them align themselves together
than the whole economy would flourish. It is for the same reason the financial crisis took place in
UK. The banks began to give too many loans and the supply increased to a great extent. The
demand dropped as the market flourished with investment. So it is important that all aspects of
the market has to be considered. The government plays an important in this situation. They do
not allow such activity to take place which would cause problems in the nation (Bassett and et.al,
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2014). The loan-able theory also depicts the same rule and it has to be followed by the
institutional investors and fund receivers. In the given scenario banks were responsible for the
entire crisis. They did not value the interest of the general public and began to increases their
sales (Kwaak and et.al., 2016). This caused the imbalance in the market and the entire nation has
to feel the impacts of it.
CONCLUSION
The financial crisis in UK and entire European Union had a major impact on the banking
system of various nations. It was accompanied by weak global growth, fiscal deficits, debt
restructuring and unfavourable credit situations. After the crisis banks began to tighten their
credit policies to save themselves which made the situations more worse. But with the time,
banks have realised their wrong decisions and they have began to ease their policies. It has also
benefited the entire nation as the equilibrium which was disturbed at the initial stages of the
crisis has began to shift. Thus it is important for all the institutional decision makers to realise the
importance of find receivers and then make any move. This would help in bringing the demand
and supply needs at the same level. The BLS and SAFE surveys have been evaluating this aspect
of the market and it should be used by the government to analyse the market. It will facilitate the
growth and the economic development of the country.
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REFERENCES
Books and Journals
Bańkowska, K., Osiewicz, M. and Pérez-Duarte, S., 2015. Measuring Nonresponse Bias in a
Cross-Country Enterprise Survey. Austrian Journal of Statistics. 44(2).
Bassett, W.F. and et.al., 2014. Changes in bank lending standards and the macroeconomy.
Journal of Monetary Economics. 62. pp.23-40.
Christie, A.N., 2013. Asymmetric information and bank lending: The role of formal and informal
institutions (a survey of laboratory research). In Experiments in Financial Economics (pp.
5-30). Emerald Group Publishing Limited.
Ferrando, A. and et.al., 2012. Measuring the opinion of firms on the supply and demand of
external financing in the euro area. IFC Bulletin. 28. p.283.
Hannigan, B., 2015. Company Law. Oxford University Press.
Ivashina, V. and Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. Journal
of Financial economics. 97(3). pp.319-338.
Kraemer-Eis, H. and Lang, F., 2012. The importance of leasing for SME finance. EIF research
& market analysis working paper 2012, 15.
Kremp, E. and Sevestre, P., 2013. Did the crisis induce credit rationing for French SMEs?.
Journal of Banking & Finance. 37(10). pp.3757-3772.
Kwaak, T. and et.al., 2016. Survey on the access to finance of enterprises (SAFE) - Analytical
Report 2014.
https://www.researchgate.net/publication/271821875_Survey_on_the_access_to_finance_of_ent
erprises_SAFE_-_Analytical_Report_2014
Rocha, R.D.R., Farazi, S., Khouri, R. and Pearce, D., 2011. The status of bank lending to SMES
in the Middle East and North Africa region: the results of a joint survey of the Union of
Arab Bank and the World Bank. World Bank Policy Research Working Paper Series.
Schouten, B., and et.al., 2012. Evaluating, Comparing, Monitoring, and Improving
Representativeness of Survey Response Through R-Indicators and Partial R-Indicators.
International Statistical Review. 80. pp. 382-399.
Schouten, B., Cobben, F. and Bethlehem, J., 2009. Indicators of Representativeness of Survey
Response. Survey Methodology. 35. pp. 101-113.
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Schouten, B., Shlomo, N. and Skinner, C., 2011. Indicators for Monitoring and Improving
Representativeness of Response. Journal of Official Statistics. 27. pp. 1-24.
Online
Loan-able funds Market. 2016. [Online] Available through:
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Unlocking lending in Europe. 2014. [Online] Available through:
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BLS demand and supply. 2016. [Online] Available through:
<http://www.bis.org/ifc/events/6ifcconf/ferrandoetal.pdf>. [Accessed on 4th April 2016].
Euro area bank lending survey. 2016. [Online] Available through:
<https://www.ecb.europa.eu/stats/pdf/blssurvey_201601.pdf?
4bd32f9c94e348f242a3d86d5dbd029a>. [Accessed on 4th April 2016].
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