New Strategies to Finance Small Enterprises in Russia

Restricted access to finance is often stated as one of the main obstaclesto the development of the SME sector in Russia. In this paper, wepropose a new lending strategy that allows private banks to profitablyincrease financing of this sector in spite of being at a disadvantagecompared to the state-owned Sberbank. By building a reputation fortough liquidation in cases of financial distress private banks can overcomeinformation asymmetries by self-selection. However, this strategycan only work if (i) bankruptcy law allows for easy liquidation, (ii) thebanking industry can sustain positive profit margins, and (iii) interestrates are not too high.