Recently, at the Pittsburgh G-20 summit, the G-20 has committed to identifying lessons learned from the innovative approaches to the provision of financial services to SMEs and to promoting successful regulatory and policy approaches.<sup>1</sup> SME development is high on the reform agenda of many governments. A broad range of policies and programs target improvements in SME business environments, as well as financial support to SMEs.

Despite the importance of SMEs for job creation and production, most of the SME literature points to the fact that small and medium firms face higher barriers to external financing than large firms, which limits their growth and development.<sup>2</sup> Numerous studies that use firm-level survey data demonstrate that access to finance and the cost of credit do not only pose barriers to SME financing, but also constrain SMEs more than large firms. Small firms find it difficult to obtain commercial bank financing, especially long-term loans, for a number of reasons, including lack of collateral, difficulties in proving creditworthiness, small cash flows, inadequate credit history, high risk premiums, underdeveloped bank-borrower relationships and high transaction costs (IFC, 2009). This is evidenced in the works of Scholtens (1999), Schiffer and Weder (2001), Galindo and Schiantarelli (2003), IADB (2004), Beck _et al._ (2006), and Beck and Demirgüç-Kunt (2006).<sup>3</sup> In particular, Beck _et al._ (2008a) conclude that smaller firms and firms in countries with underdeveloped financial and legal systems use less external finance, based on data from a firm-level survey in 48 countries.<sup>4</sup> A broad range of business environment factors are linked to SME performance. For example, Ayyagari _et al._ (2007) find that lower costs of entry and better credit information sharing are associated with a larger size of the SME sector, while higher exit costs are associated with a larger informal economy. The overall banking structure is another important factor. Shen _et al._

> 1 See the Pittsburgh G-20 Summit “Leaders’ Statement” at http://www.pittsburghsummit.gov.

> 2 Enterprise Analysis survey data at http://www.enterprisesurveys.org/; IFC (2009); Beck _et al_ (2008b).

> 3 For earlier research, see Hartwell (1947) who reports a negative correlation between loan size and interest rates, and Murphy (1983) who argues that small loans to small firms are more costly for the lenders.

> 4 Studies that focus on a specific country report similar results. Stephanou and Rodriguez (2008) find that access to credit is one of the biggest constraints for SMEs in Colombia; Binks and Ennew (1997) find that the main constraints to growth of SMEs in the UK include management, labor skills, regulation and lack of access to finance; Hutchinson (2006) compares the cases of a leading transition country, Slovenia and an established market economy, Belgium, and finds that the SME sector in Slovenia remains underdeveloped, mainly due to the inability to raise external finance. Studies by Anderson and Kegels (1997), Budina _et al._ (2000), Gros and Suhrcke (2000), Konings _et al._ (2003) all indicate that this appears to be the case in most of Central and Eastern Europe.

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