taking and pricing. Degryse and Ongena (2002) use contract information of 15,000 bank loans from one bank to small firms in Belgium, including the distance between the borrower and the lending bank as well as the distance from the borrower to the competing banks, to study the importance of geographical distance in explaining the pricing and availability of loans to small firms. Petersen and Rajan (2002) use the 1993 National Survey of Small Business Finance, which provides financial information about the firm (balance sheet and income statement) as well as a documentation of the firm’s relationship with financial institutions, to show that lenders are becoming more productive in using alternative sources of information which has eroded the importance of distance for monitoring purpose and increased access to finance for more distant firms.

This paper provides an application of the unique use of credit registry data and ICA data from Brazil to identify the determinants of firms’ demand for external bank credit and to identify the classes of firms unduly rationed. The structure of paper is as follows. The first part of the paper briefly provides a conceptual framework and review relevant literature on the concepts of measuring financing constraints and access to financial services. The paper next presents the specific data we have for Brazil and provide some basic statistics. The paper then presents a methodology to address endogeneity issues that might arise in the analysis as well as the results . Finally, the paper concludes and offers some suggestions about where further data collection and research would be useful.

# **2. Conceptual Framework**

  Availability of external financing and the lack thereof financing constraints depend on demand and supply considerations. The start of the analysis is to differentiate between access and usage of financial services. Usage is the actual consumption of financial services, whereas access is the availability of the supply of financial services at a “reasonable cost”. Hence, there can be a difference between access and usage (Figure 1). While all users have access, it is not the case that all non-users do not have access. When a firm does not use financial services, it may have access but choose not to use it; or it may not have access and thus cannot use it. Furthermore, the reasons for not using financial services are multiple. As with other goods and services, demand for financial services may not exist even when access exists. Many firms in developed countries finance themselves internally and choose not to use bank financing. Or a firm may not have enough growth opportunities to justify external financing. So, while they likely have access, they may (appear) not be burdened by lack of use. There will also be firms that are voluntarily excluded, e.g., they think they will be rejected, but would actually have been accepted, and involuntarily excluded, e.g., firms that are discriminated against.

Equally important, and even in the best financial systems, financial service providers may not wish to supply financial services to all firms since it is not profitable or sustainable to do so. Financial institutions typically say it a too high-risk, high-cost proposition to cater to small firms. High transactions costs for small volumes, combined with difficulties in contract design and enforcement make for not conducive supply. Banks will not be able to profitably run branches in remote areas to cater to firms. This does not reflect any market failures, but rather indicates that finance, like other services, has its own supply forces.

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