We’ve just published our latest evidence review on access to finance.
We tend to avoid over-interpreting in our evidence reviews, preferring to focus on an objective presentation of the impact evaluation evidence. But I think that this evidence review raises a number of interesting challenges with respect to access to finance policy.
The first thing to note is that the evaluations suggest that schemes help increase access to debt finance – either in terms of the cost of borrowing or access to credit. Assuming that the evaluations have done a reasonable job in constructing a suitable comparison group (something which or minimum standards hope to ensure) then this suggests that some of the debt finance being accessed through these schemes is additional. That is, access to finance schemes don’t just crowd out private sector lending. At least some of the firms in the programmes are getting access to finance that non-participants aren’t able to access.
Unfortunately, the findings aren’t so positive on equity finance – although there are relatively few evaluations that look at equity as opposed to debt.
Taking these results at face value the crucial question is, of course, whether better access to finance improves firm performance. Here, unfortunately, the evidence is far less positive.
Only 2 out of 5 evaluations that look at investment find positive effects and none of the three studies that look at assets. Two out of three studies that look at default risk suggest that this may increase as a result of programme participation. More importantly, from a local economic growth perspective only 1 in 4 evaluations show a positive effect for start-ups. For existing firms, only 2 in 5 evaluations show positive effects for firm survival and only 6 out of 11 find positive effects for employment. Results for wages and income and for sales and turnover are slightly, but not a lot, more positive.
In short, while most programmes appear to improve access to finance, there is much weaker evidence that this leads to improved firm performance. This makes it much harder to assess whether access to finance interventions really improve the wider economic outcomes (e.g. productivity, employment) that policymakers care about.
Given the popularity of these programmes with policy makers, that begs the question as to whether the evaluations tell us how to improve policy effectiveness. Unfortunately, the existing evidence isn’t much help here.
Schemes targeted at small and medium size enterprises are no more or less effective than non-targeted programmes. Other targeted programmes (taken as a group) do appear to perform slightly less well. But that might not be surprising if they are tackling bigger challenges – and the effects are not that large.
Changing the type of scheme doesn’t seem to make much difference either – the overall results for loan guarantee schemes are pretty similar to alternative mechanisms.
Perhaps unsurprisingly, schemes introduced in response to economic crisis perform slightly worse than longer term development schemes. But that’s cold comfort given the overall balance of findings of the effect of access to finance schemes on firm performance.
Click through to the review page to read all the findings.