Is the cost of providing credit holding back Europe’s productivity?

By Michael Bolle, Co-founder and CEO, DecAltra

Europe does not lack ambition for greater investment, innovation and productivity. My view is that it should also pay closer attention to the practical economics of lending: whether viable businesses can obtain suitable finance at the right time, through processes that are rigorous and sustainable for lenders to operate.

Finance that fits the opportunity

The European Central Bank’s work on finance and productivity makes the case plainly: the way external funding is allocated can affect which firms grow, enter and exit a market. When productive businesses cannot secure finance, productive capacity can suffer. A 2024 European Investment Bank study finds that funding difficulties affect firms’ investment, performance and growth, with micro and small businesses and leading innovators particularly vulnerable when financing conditions deteriorate.

The implication is not that every business should receive a loan. Bank credit, private credit and equity each have different roles. The task is to match the finance to the opportunity, while maintaining sound assessment and oversight.

The cost of making a decision

For financial institutions, the cost of assessing, documenting and monitoring a loan to a small business can be high relative to the size of that loan. Lending economics shape where financial institutions can profitably devote attention and capacity. When the cost of understanding a business is too high, a viable opportunity may take longer to finance, receive less suitable funding, or not be pursued at all.

The Bank’s analysis of lending returns identifies higher impairment rates and operating costs as the main contributors to lower estimated SME lending profitability. Its estimates depend on cost-allocation assumptions and do not describe every bank’s experience.

This is not an argument for lower lending standards. It is an argument for making the work needed to meet those standards more efficient, connected and repeatable. Underwriting, compliance, monitoring and servicing involve substantial work per borrower. A smaller company may borrow less than a large corporate but still require a robust assessment, a clear audit trail and continuing oversight.

The OECD finds that financial-sector digitalisation is associated with stronger average industry productivity growth, with larger effects in intangible-intensive sectors. Its cross-country estimates show an association, not proof that digitalisation alone causes growth. But they reinforce the case for reducing avoidable information and process frictions in the provision of finance.

Banca d’Italia’s study of lending during the pandemic found that more digitalised banks expanded credit more, particularly to smaller, financially sounder firms. Its crisis-period setting means the findings should not be read as a universal rule. But they support a practical proposition: better information flows and digital processes can increase a lender’s capacity to assess and serve businesses.

Technology alone cannot resolve every financing gap. It cannot make an unsuitable loan suitable, remove uncertainty from an early-stage business, or replace professional judgement. Its proper role is to reduce repeated preparation, connect evidence to analysis, and give experienced professionals more time to understand the opportunity in front of them.

Here is an anecdotal observation from DecAltra’s experience working with clients, rather than a general empirical finding. Creating a credit memorandum can take weeks. The work is not only the analysis itself. It is also gathering information from separate systems, checking figures, explaining adjustments and assembling a decision record that colleagues can review.

The cost continues after approval when a decision cannot be retraced easily. If the source information, assumptions and professional judgement behind a credit decision are dispersed, a team has to reconstruct its understanding when it monitors a borrower, prepares a renewal or investigates a change in performance.

In our experience, this makes it harder for an institution to build on the intelligence created by earlier decisions. The question is not only how quickly a case can be prepared, but whether the understanding created in that work can be carried forward.

A practical productivity question

If Europe wants more productive investment, it should ask whether the operational cost of delivering credit is preventing capable lenders from serving viable businesses at scale. The EIB’s work on investment and productivity suggests that deeper, better-integrated finance can improve the allocation of capital towards productive firms; this is a long-term relationship, not a guarantee from any individual loan.

The practical objective is better allocation of suitable finance, enabled by reliable information, efficient analysis, transparent evidence and informed professional judgement. Technology can expand capacity, but it cannot make an unsuitable loan suitable or replace professional judgement.

Improving the economics of rigorous lending could help viable businesses access suitable finance sooner, supporting investment and productivity without compromising credit standards.

Written by DecAltra. This is an interpretation of the research cited below; it does not represent the views of the cited institutions.

Research references

1. European Central Bank. Low firm productivity: the role of finance and the implications for financial stability. Financial Stability Review, November 2024.
2. European Investment Bank. Do financing conditions pose a threat to the performance and transformation of SMEs? Economics Working Paper 2024/08.
3. European Investment Bank. Investment Report 2024/2025: Innovation, integration and simplification in Europe. 2025.
4. OECD. Digitalisation of financial services, access to finance and aggregate economic performance. OECD Working Paper, 2024.
5. Colm Manning, Prashant Babu, Ben Bourdais and Robert Włodarski. What drives differences in commercial banks’ product level returns? Bank of England, Bank Insights, 19 June 2026.
6. Sarah Breeden and Colm Manning. Finance, growth and productive investment: what is the FPC assessing in 2026? Bank of England, Bank Insights, 22 September 2026.
7. Bank of England. Unlocking growth: what can the literature tell us about what’s holding back high-growth firms? Bank Overground, 2 October 2025. Prepared with the help of Sudipto Karmakar and Isabelle Roland.
8. Nicola Branzoli, Edoardo Rainone and Ilaria Supino. The role of banks’ technology adoption in credit markets during the pandemic. Banca d’Italia, Working Paper 1406, March 2023.