103 MARTINDALE CENTER FOR THE STUDY OF PRIVATE ENTERPRISE 2020), especially among SMEs. Many operate in an informal economy, estimated at 24.1% of GDP (World Economics, n.d.), limiting their documented financial records and making it difficult to meet standardized loan criteria. This discrepancy suggests that the primary impediments to financial access are not a low availability of funds or a fragile system but a combination of ground-level factors, such as informality and systemic mechanisms of credit allocation along with cultural norms. Croatia’s Hofstede Uncertainty Avoidance Index score of 80 (Matic, 2006), one of the highest in Europe, is argued to be characteristic of post-transition economies. High uncertainty avoidance is directly linked to more conservative bank lending (Kanagaretnam et al., 2011), illustrating a clear foundation for the conservatism that Croatian banks have not only demonstrated but also openly self-described to the HNB (Galac & Dukić, 2008). Mechanisms of SME credit constraint As in most countries, Croatia’s SMEs are dominated by small, asset-light firms, such as family businesses and rural producers, who have thinner balance sheets and less formal documentation of their revenues and expenditures. With ~99.8% of all firms in Croatia described as SMEs, employing 70% of the workforce, this sector plays a crucial role in the economy (European Commission, 2025). In larger, more diversified economies, bank models often find a large pool of medium-sized firms that meet their criteria. But in Croatia, this sector is relatively thin, so the same underwriting models used by foreign parent banks abroad exclude a larger share of the Croatian economy by default (Kolaković et al., 2019). With most of these large banks remaining subsidiaries of foreign groups, competition and innovation are restricted, and decisions on domestic lending, especially to riskier sectors, such as SMEs, agriculture, and rural development, tend to more closely reflect risk policies set in cities like Vienna, Milan, and Frankfurt rather than Croatia’s local needs. This dynamic can constrain local growth as large multinational banks often standardize their underwriting models to accommodate differences in economic conditions across the countries they operate in. Their models emphasize formal financial statements over relationship-based lending, typically requiring strong credit histories and collateral pools (Beck et al., 2012). In 2013 Croatia, 87% of all loans to small firms required collateral at a collateral-to-loan ratio of ~194% (IFC, 2013). For reference, a 2012 World Bank survey across 43 developing countries recorded 70% of small business loans requiring collateral at a ratio of ~138%. The EU averages of these figures are also lower, with 70% of credit amounts collateralized at an average ratio of ~167% (World Bank, 2020). These discrepancies suggest that international banks operating in Croatia were particularly stringent in their collateral requirements. Croatia’s 10-year sovereign bond spread over German Bunds averaged about 70 basis points in the early 2020s (Investing. com, 2026), much lower than that of countries like Italy, which have been closer to 100 basis points (Rebaudo, 2025), meaning Croatian SMEs must pledge more collateral than firms in comparable or riskier countries. In 2013, the Croatian spread was over four times as high, at roughly 300 basis points, a risk environment that would make strict collateral requirements necessary. Banks appear to have calibrated their collateral requirements to that higher risk environment and never sufficiently adjusted, establishing lingering high collateral demands that explain the persistent constraints reflected by the post-2016 European Investment Bank (EIB) survey data. Berger and Udell (1995) show that relationship lending, dependent on the local, qualitative knowledge foreign banks struggle to access, is the leading mechanism that eases collateral demands on small borrowers. Croatia’s foreign-dominated banking is poorly equipped to deliver these lower requirements, ultimately suggesting that lending constraints reveal overly conservative banking practices instead of underlying risk. A low availability of financial services has also been a major obstacle to growth for Croatian SMEs. The World Bank found over 40% of surveyed SMEs not using business loans, with more than 50% of those reporting inability to access a loan as their primary reason (World Bank, 2020). Multiple other factors partially explain the remainder. Notably, debt faces high cultural stigmatization in Croatia, and internal funds account for 65% of business investment. However, only 7% of firms say they are “happy” to use internal funds, suggesting that the need to expand outweighs debt’s cultural stigma and reliance on self-financing may be a forced necessity due to structural exclusion (World Bank, 2020). Furthermore, the Investment Promotion Act offers tax credits of up to 100% for 10 years for certain business investments (PwC, n.d.), making reinvestment of internal funds much more appealing than paying interest on debt. A separate assessment of Croatia’s agriculture and agrifood industries identifies a financing gap
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