SME Finance: Constraints and an Information Asymmetric Perspective

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Chokey Wangmo, PhD (Author) – CEO, Bhutan Care Credit Ltd., Microfinance Project, His Majesty’s Secretariat, Thimphu, Bhutan
Sardar Islam (Author) – Certified Public Accountant, Professor (Researcher) – Institute of Sustainable Industries and Liveable Cities, Victoria University, Melbourne, Australia

Series: Financial Institutions and Services
BISAC: BUS070140
DOI: https://doi.org/10.52305/YNJH5087

This book studies the gap between bank financing and the small and medium sized enterprises (SME) sector, based on the economic theories of information asymmetry and agency theory. Access to finance continues to remain one of the key constraints faced by SMEs to start and expand businesses, particularly in the developing economies where access to bank loans is subject to the availability of collateral. The SME financing gap, studied from the perspectives of both the key actors – banks and SMEs – is well presented in this book. The authors have used Sequential Explanatory Design, a mixed methodology, to collect data from SMEs and banks. The econometric model of the study represented SMEs’ debt accessibility as a function of independent variables of loan repayment capacity, financial information, characteristics of the firm and owner and bank loan characteristics.

The book provides empirical evidence that SME financing constraints are caused by factors arising from SMEs as well as the banks, primarily SMEs’ high information opacity and banks’ imposition of collateral to offset the credit risk. In the estimation of the econometric model, the size of collateral and owner’s equity were among the most significant predictor variables. Likewise, the thematic analysis of interview data of credit officers to understand the banks’ lending behavior evidenced a strong positive relationship between the size of the collateral and owner’s equity and access to bank loans. SMEs’ high information opacity and credit risk induced adverse selection and credit rationing on the part of finance providers. The findings of this book contribute towards academic literature on developing economies characterized by limited data available for academic and empirical research.

This book provides a unique example of rigorous research on SME finance within an information economics framework. The theoretical issues are nicely balanced by the practical application of information economics to an emerging market. It can be used as a reference by researchers, academics, practitioners and policy makers in the areas of development finance, banking, development economics, microfinance and rural development. In addition, it can be used as an academic reference for a finance subject at the Master’s or Doctoral level. The book is relevant to key stakeholders in understanding the debt inaccessibility from SMEs and the banks in drafting policies and measures to address the SME financing gap.

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Description

Preface

Acknowledgment

Foreword

List of Tables

List of Figures

List of Abbreviations

Chapter 1. Introduction

Chapter 2. Bhutan – Business, Finance and SME

Chapter 3. SME Finance: Issues and Theories

Chapter 4. Research Design and Methodology: Theoretical Framework

Chapter 5. Descriptive Statistics of SMEs

Chapter 6. Data Analysis: Phase I Quantitative Method

Chapter 7. Data Analysis: Phase II Qualitative Method

Chapter 8. Discussion, Recommendation and Conclusion

References

Appendices

Additional information

Binding

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