The impact of inclusive lending support on the performance of small and micro enterprises: Evidence from China

Abstract

Small and micro-sized enterprises (SMEs) are essential drivers of economic growth and innovation, yet they often face significant financial constraints that hinder their development. While many countries have introduced inclusive financial measures to address these challenges, evidence on the effectiveness of inclusive financial policy in improving SMEs' performance is scarce. Using a sample of Chinese SMEs from 2013 to 2022, this study examines the impact of China's inclusive lending policy on SMEs' performance. We find that the policy significantly enhances the performance of SMEs. Furthermore, the positive effect of the policy is more pronounced for financially constrained SMEs, specifically those with poor credit histories, low operational efficiency, or insufficient collateral assets. Our channel tests indicate that the inclusive lending policy enhances SMEs' performance primarily by improving their access to finance, rather than by reducing borrowing costs. Our study offers practical guidance for policymakers in designing targeted financial solutions for financially constrained SMEs and for financial institutions in managing credit risks arising from their support for broader economic inclusivity.