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Microenterprises and multiple bank relationships: The case of professionals

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Abstract

The present paper focuses on professionals as a special group of microenterprises. It explains their characteristics and financial relationships, using data from a survey conducted in Germany in 2002. Consistent with the theory of asymmetric information and relationship lending, we find that these firms maintain a small number of bank relationships, which increases in firm size and age. They tend to choose multiple banking relationships to overcome credit rationing and finance larger loans. Credit risk and the structure of the banking market do not seem to matter.

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Notes

  1. For surveys, see Boot (2000), Ongena and Smith (2000a) and Elyasiani and Goldberg (2004).

  2. See Ongena and Smith (2000b) and Qian and Strahan (2005) for cross sections of countries, Guiso and Minetti (2004) for the US, Cosci and Meliciani (2002) and Detragiache et al. (2000) for Italy, Machauer and Weber (2000) and Harhoff and Körting (1998b) for Germany, Ziane (2003) for France, Neuberger et al. (2006) for Switzerland, Degryse and Ongena (2001) for Norway, Berger et al. (2001b) for Argentina, Berger et al. (2005) for India, Yu and Hsieh (2003) and Fok et al. (2004) for Taiwan, and Ogawa et al. (2005) for Japan.

  3. We use ‘housebank’ and ‘relationship bank’ as synonymous terms. A housebank is usually defined as the major lender of a firm and does not preclude that the firm holds also other bank relationships. For German universal banks, the incidence of a housebank status has been shown to be positively related to the bank’s share of borrower debt financing, but negatively related to the firm’s number of bank relationships (Elsas 2005).

  4. See, however, Baas and Schrooten (2006), who show that the lack of reliable information leads to comparative high interest rates even if a long-term bank–borrower relationship exists.

  5. For empirical evidence, see Brunner and Krahnen (2002), who show that the success probability of a workout of financially distressed firms depends negatively on the number of lending banks. Gilson et al. (1990) and Petersen and Rajan (1994) find that a larger number of creditors worsens the terms of credit and increases the cost of financial distress to small firms.

  6. For an overview, see Ongena and Smith (2000a, pp.243). Medium and larger firms typically hold more than three bank relationships in Germany (Elsas and Krahnen 1998, Machauer and Weber 2000), Argentina (Berger et al. 2001b), Taiwan (Yu and Hsieh 2003, Fok et al. 2004), India (Berger et al. 2005), and the majority of 20 European countries (Ongena and Smith 2000b). While firms in the UK, Norway and Sweden maintain fewer than three bank relationships on average, firms in Italy, Portugal, Belgium and Spain maintain on average 10 or more bank relationships (Ongena and Smith 2000a).

  7. See also Petersen and Rajan (1994), Harhoff and Körting (1998a), Farinha and Santos (2002) and Ongena and Smith (2000b).

  8. Transaction lending is generally viewed as being focused on informationally transparent borrowers. However, this view is oversimplified, because only one transaction technology (financial statement lending) is focused on transparent borrowers, while other transaction technologies (small business credit scoring, asset-based lending, factoring, fixed-asset lending and leasing) are targeted to opaque borrowers (Berger and Udell 2005).

  9. For empirical evidence, see Carter et al. (2004).

  10. See among others Akhavein et al. (2004), Berger et al. (2001a), Jayaratne and Wolken (1999) and Strahan and Weston (1998). For an overview see Akhavein et al. (2004) and Carter et al. (2004).

  11. The long-term relationship between banks and small firms in Germany has been strengthened by the increasing bank competition, which induced banks to provide more long-term funds and information to small firms (Audretsch and Elston 2002, p. 6).

  12. Farinha and Santos (2002) find for young firms in Portugal that the chance of substituting a single banking relationship with multiple banking relationships increases with the duration of that relationship. Ongena and Smith (2001) show for Norwegian firms that the probability of ending a bank relationship increases in duration and that small, young and highly leveraged firms maintain the shortest relationships.

  13. Since technological change has eased the ability to lend to small firms at a distance (Petersen and Rajan 2002), out-of-market lending to small firms in local markets increased substantially in recent years (Hannan 2003).

  14. The low response rate is likely to be due to the fact that the questionnaire contained some very personal questions and questions about financial matters, which are reluctantly answered online. In Germany, there is still much concern about the safety of the internet, and especially older persons are reluctant to use this medium. In our sample, the mean age of the self-employed persons acting as professionals is 49 years.

  15. Harhoff and Körting (1998b) find a mean number of lending relationships of 1.8 for micro and small firms. Hommel and Schneider (2003, p.64) find a mean number of lending relationships of 1.9 for microenterprises with an annual turnover less than EUR 1 million in 2002.

  16. For comparison with the descriptive statistics of other studies, see Menkhoff et al. (2006, Table 2). While the previous studies usually measure the duration of all lending relationships, our duration variable refers only to housebank relationships, which are held in most cases.

  17. Table 1 only reports the independent variables used by most of the previous studies. Loan-specific variables are also included by Neuberger et al. (2006).

  18. In the present sample, investment credits are not only collateralized by real estate (63% of the cases), but also by transfer of property by way of security (25% of the cases), assignment of claims (20% of the cases) and personal guarantees (20% of the cases).

  19. At the time of our survey, the possible advantage of the Basle II rules for small firms, given by lower bank capital requirements for the retail portfolio, had not been discussed yet. For recent research on the effects of the Basle II reform on retail credit markets, see Claessens et al. (2005) and the remaining papers in the respective special issue of the Journal of Financial Services Research.

  20. See Greene (2000, pp. 508) and Hackl (2004, pp. 174).

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Acknowledgments

We are grateful to Robert Hauswald and two referees for helpful suggestions and comments

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Authors and Affiliations

  1. Department of Economics, University of Rostock, Ulmenstr. 69, Rostock, D-18057, Germany

    Doris Neuberger & Solvig Räthke

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  1. Doris Neuberger
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Correspondence to Doris Neuberger.

Appendix

Appendix

Table 5 Distribution of firm size per industry
Full size table
Table 6 Relation between duration of housebank relationship and firm age
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Table 7 Correlation matrix of regressors
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Table 8 Regression results (Poisson)
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Neuberger, D., Räthke, S. Microenterprises and multiple bank relationships: The case of professionals. Small Bus Econ 32, 207–229 (2009). https://doi.org/10.1007/s11187-007-9076-8

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