In the aging economies of Europe, the financing of small enterprises and entrepreneurially active people is important to sustain growth. An open question is whether special demographic groups such as the elderly, singles, females or immigrants are disadvantaged on loan markets because they present higher risks for the banks. Credit risk may be particularly high in declining regions with low wealth and population density. Previous studies on small business loan terms focus on the influence of characteristics of the firm, the loan and the lending relationship on interest rates, neglecting socio-economic and demographic variables. New research by Doris Neuberger and Solvig Räthke-Döppner closes this gap by examining for the first time the influence of the entrepreneur’s age and marital status as well as population density of the region where the firm is located on loan rates of small enterprises in Germany. It is based on a large data set, covering 13,142 observations for the period 1995-2010 and including new variables of soft and hard information about the borrower. It focuses on declining regions of East Germany, where the financing of small firms is particularly important to maintain growth and catch up to the richer regions of West Germany.
We find that relationship lending plays a larger role for loan prices than demographics. Loan rates decrease with soft information gained through longer loan processing time and a larger number of accounts used at the same bank. They increase with hard information about past repayment arrears and reminders. Late payments have the largest influence on loan prices. Risk-adjusted pricing based on payment history, as prescribed by Basel III and MaRisk in Germany, neglects future prospects and prevents intertemporal smoothing of loan rates.
Even if banks include age limits into their credit granting directives, because they fear higher illness or mortality risks, they do not seem to discriminate older entrepreneurs by higher loan rates. Rather, we find that the younger have to pay more because their loans and businesses are smaller and they lack liquidity to pay in time. Marital status and population density of the region where the firm is located do not matter. Single entrepreneurs and firms in regions with low population density are not disadvantaged by higher loan rates. This is good news in view of the rising share of singles and growing disparities between agglomerated and peripheral regions due to demographic change.
This study is based on bank-internal data of savings banks in East Germany and therefore is not representative for the whole country. Because of data protection reasons, it does not include information on gender, nationality or migration background of the entrepreneur. Whether female entrepreneurs or immigrants are disadvantaged on the loan market in Germany is still an open question, which has to be tackled in the future.
Financial support by the German Research Foundation (DFG) is gratefully acknowledged.
Doris Neuberger and Solvig Räthke-Döppner, The Role of Demographics in Small Business Loan Pricing, Small Business Economics, 2014. Download: http://link.springer.com/article/10.1007/s11187-014-9602-4
University of Rostock, iff Institute for Financial Services Hamburg, and CERBE Center for Relationship Banking and Economics Rome