This paper provides analyses of the effect of corruption in South Asia on (1) credit access for small-and medium-size enterprises (SMEs), and (2) credit constraints faced by female-owned and male-owned SMEs. By addressing potential endogeneity and reverse causality of corruption and credit constraints via instrumental variables, this study reports that corruption has a detrimental effect on credit access. Specifically, corruption increases the probability of SMEs credit constraints by 7.63%. However, gender differences emerge, indicating that bribery is slightly more effective when used by female SME owners. When male-owned SMEs pay bribes, they are on average 0.61% more credit-constrained than their counterparts. For female-owned SMEs paying bribes, they are on average 0.78% more likely to be less credit-constrained compared to female SME owners who do not pay bribes. Overall, bribery is not very effective in achieving the desired outcome and attitudes towards bribery as unethical may be more a question of culture than of gender
This study investigates the effect of paying bribes on access to credit for small, and medium enterprises (SMEs). Bribery is variously portrayed in the literature as greasing the wheel (helping) or sand in the wheel (impeding) when applying for credit leaves the issue unresolved. Using The World Bank Enterprise Surveys of SME data, an answer for India emerges using an instrumental variable probit model. SME bribery is detrimental to accessing credit and more so for firms that have been in business for many years and operating on a small scale. There are supply and demand side forces involved, culminating in differing size effect reactions. From a supply side perspective, when corruption is high, financial institutions find it harder to control borrower risk and recover loans. In that case, financial institutions reduce their lending to SMEs, which mostly belong to a high-risk category. Unlike large firms, SMEs paying bribes to grease the wheel are drawn to the informal sector, avoiding attention from officials. Where SMEs pay bribes in the formal sector it is noticed and is likely to increase the probability that other parties will also demand payments. The demand side argument regards bribes as a tax, increasing the cost of loans to the SMEs. Consequently, making significant bribes decreases these SMEs' profitability. Less profitable SMEs may not obtain access to credit. From a policy perspective, anti-corruption measures are vital for developing SMEs. Generalising these findings to other emerging economies suggests potentially significant welfare gains.
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