(2009), using Chinese data, find that total bank assets are not significant for banks’ decision to lend to SMEs. Yet, more local lending authority, more competition, carefully designed incentive schemes, and stronger law enforcement encourage commercial banks to lend to SMEs. Macroeconomic instability in developing countries and competition in developed countries are perceived as the biggest obstacles to SME finance. Rocha _et al._ (2010) provide supportive evidence from banks in Middle East and North Africa, noting lack of SME transparency and underdeveloped financial systems as the main obstacles.<sup>5,6</sup> At the same time, a recent study by Beck _et al._ (2008b) indicates that most commercial banks perceive the SME sector as profitable.

The lack of consistent indicators restricts extensive cross-country analyses of SME lending. Most countries either do not collect data on SME lending or do so on an _ad hoc_ basis. Even when SME data are available, it is extremely difficult to perform a cross-country analysis in the absence of a standard definition as to what constitutes an SME. Though SMEs are commonly defined as registered businesses with less than 250 employees (IFC, 2009), the definition still varies from country to country and even from bank to bank. In this respect, an OECD conference on SMEs in 2004 made two key policy recommendations to both member and non-member economies: (i) develop greater international comparability of SME statistics, and (ii) develop a common definition of an SME.<sup>7</sup> Without reliable SME data, it is difficult for policy makers to implement programs aimed at expanding and strengthening the SME sector.

> 5 One strand of the literature on SME financing indicates that SMEs pay higher interest rates on formal bank credit. For example, Cressy and Toivanen (2001) find that collateral provisions and loan size reduce the interest rate paid and that better borrowers get larger loans and lower interest rates. Hernandez-Canovas and Martinez-Solano (2007), using firm-level data from Spain, argue that close relationships with financial institutions may generate advantages such as improved conditions of financing and increased credit availability. Furthermore, Dietrich (2010) argues that the lack of negotiating power of small enterprises has significant explanatory power in explaining differences in lending rates between small and large enterprises.

> 6 There is still an ongoing debate regarding bank size and/or ownership and SME lending. Until recently, a large strand of literature argued that small banks are more likely to finance SMEs as they are better suited to engage in “relationship lending,” ( _see_ Keeton, 1995; Berger and Udell, 1995; and Strahan and Weston, 1996). The strength of bank-borrower relationship is argued to be positively related to various credit terms (Blackwell and Winters, 1997; Harhoff and Korting, 1998; Degryse and Van Cayseele, 2000; Bodenhorn, 2003; Peltoniemi, 2007). However, some recent studies, including Berger and Udell (2006), Berger _et al._ (2007), de la Torre _et al._ (2010) and Beck _et al._ (2008b), have disputed this conviction by arguing that large banks, relative to other institutions, can have a comparative advantage in financing SMEs through arms-length lending technologies, such as asset-based lending, factoring, leasing, fixed-asset lending and credit scoring, as opposed to relationship lending.

> 7 Second OECD Conference of Ministers Responsible for Small and Medium-Sized Enterprises (SMEs), Istanbul, 2004.

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