financial stability during financial crises<sup>(Goldberg,Dages,andKinney2000).Anotherstudy using data for</sup> Argentina, Chile, Colombia, and Peru<sup>finds that large foreign banks in Chileand Columbia lend slightly more (as</sup> share oftotal lending) to SMEs than<sup>large domestic banks, although their findings are not significant for Argentina</sup> and Peru (Clarke, Cull, Martinez Peria,<sup>and Sanchez 2002). Furthermore, a globalsurvey of firms fnds that firms</sup> of all sizes are less likely to identify<sup>high interest ratesandaccessto long-termloansas obstaclestogrowthin</sup> countries with higher foreign-bank<sup>participation(Clarke,Cull,andMartinezPeria2002). However,foreign-</sup> owned banks may concentrate their lending<sup>in large loans and to SMEs with favorablehard information available.</sup> One study finds that large, foreign-owned<sup>banksinArgentina appear tohaveproblemssupplyingcreditto</sup> informationally opaque SMEs (Berger,<sup>Klapper,and Udell2001).</sup> 23. Large microlenders in developing nations Large microlenders - both private and<sup>state-owned-are additionalpotential providersof community</sup> banking services. Microloans are generally defined<sup>as very small,unsecured, short-term loans tolow-income</sup> clients. These clients are often self-employed<sup>entrepreneursin the informal, unregulated sector of the economy,</sup> such as individuals that sell without business<sup>licensesandmay notkeepaccountingrecordsor pay taxes.</sup> Commercial banks may be unwilling to lend to<sup>such clients using standardcredit practices,but microlenders may</sup> be able to provide credit using alternative practices<sup>(Armendariz de Aghion and Morduch 2000, Robinson 2001).8</sup> We are not able to separately identify the large<sup>microlendersin our empirical analysis.In most countries,</sup> non-governmental organizations (NGOs) and<sup>commercialmicrolenders are not regulatedby the bank regulators</sup> (although some may take deposits) and<sup>donothavepublic filingrequirements,andso theirinformationis</sup> a In recent years, there has been a significant<sup>increasein large, profitablelending by microfinance lenders that have operated</sup> without government subsidies. The trend from<sup>non-profittofor-profit, "commercial"microlendingreduces thissector's</sup> dependence on government subsidies and<sup>outlays, whileimprovingservicestothe poor.The commercializationof</sup> microlenders in Latin America has been<sup>shown to not reducetheir goal of providing credit to the poorer clients (Peck 2000).</sup> It is argued that the majority of successful<sup>microfinanceinstitutionsareprivate institutionsthatlendonmarket-based</sup> principles (CGAP Focus Note 1997). This<sup>report also suggests that state-owned microfinance institutions are often subject to</sup> political influences and suffer from poor<sup>lending practices, such as weak borrower selection criteria and subsidized lending</sup> rates. An example is Bank Rakyat Indonesia<sup>(BRI),a profitable state-owned bank and microfinancelender.It operateswith</sup> US$12 billion in assets, a nationwide network<sup>of 325branchofficesand3,595unit "desas"thatprovidemicrofinancial</sup> products. Until the 1980s, all lending<sup>decisionswere madecentrally,local units had no financialaccountability, and bank</sup> arrears rose to over 30%. The key to the bank's<sup>turnaround success was the that desa staffwere given complete operational</sup> autonomy for their unit, without any government<sup>mandateson reachingspecific "lendingtargets"for specificpopulation</sup> groups. Each unit desa is treated independently,<sup>with its ownbalance sheetand incomestatements. Inaddition, the bank</sup> requires from each unit clear and transparent<sup>financialreportingand imposes local fiscal accountability. Furthermore,unit</sup> managers are held accountable for their<sup>performanceand receivefinancialincentives.This example highlights the potential</sup> benefits from a large organization using decentralization<sup>tooffsetsomeof itsdisadvantagesinSMElending (Robinson</sup> 2001).

9