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Bank Lending and Entrepreneurial Finance: The Performance of Canadian Banks

Type: Research Studies
Date Published: January 14, 2008
Research Topics:

Access to readily available financing to start and expand a business is a barrier faced by many Canadian entrepreneurs and small businesses. One solution lies in lifting restrictions on foreign banks entering Canada for the sole purpose of lending in order to increase competition and provide additional credit to entrepreneurs and small businesses.

The study examines the performance of Canadian banks in financing entrepreneurship and compares Canadian performance to that of banks in other industrialized nations.

Bank loans, lines of credit and other banking products are among the most used external sources of finance for Canada's small and medium-sized businesses. If the Canadian banking sector does not perform well in this area, Canadian entrepreneurs are hobbled and creative people face additional barriers when bringing new ideas to the market. That in turn limits entrepreneurs' potential to grow their businesses and create new jobs and employment opportunities.

The study found that while Canada performs reasonably well in terms of the overall health of its banking system, its performance in terms of financing entrepreneurs is weaker. International research shows that Canadian banks lag behind industry leaders in the two most important measures: the amount of bank lending (in terms of the quantity of funds) and the terms by which that lending is provided as measured by the spread between the banks' interest returns and costs.

In terms of private sector bank lending as a percentage of GDP, Canada ranks 20th out of 22 industrialized countries. This ranking increases to 16th when all private sector institutional lending such as credit unions is included.

The terms of financing indicate how efficient banks are in performing their role. If financing terms are onerous or costly, that has a direct impact on entrepreneurs by raising the costs of obtaining financing for their businesses. In this area, Canada ranks 10th out of 22 industrialized countries.

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