Collateral and SME financing in Bangladesh: an analysis across bank size and bank ownership types

Ashiqur Rahman,Aleksandr Ključnikov,M Twyeafur Rahman

doi:10.14254/2071-8330.2016/9-2/8

Ashiqur Rahman, Aleksandr Ključnikov + Show 1 more

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https://doi.org/10.14254/2071-8330.2016/9-2/8

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Abstract

Collateral and SME financing in Bangladesh: an analysis across bank size and bank ownership types

Highlights

Difficulties in getting easy access to finance are treated as one of the foremost barriers to the development of Small and Medium Enterprises (SMEs) in developing countries and in developed countries due to information asymmetry between borrowers and lenders
Our inference is opposite to Jimenez et al (2006, 2009) where they stated that small banks have limited credit expertise than the large banks and for that reason the small banks relay on collateral security to provide credits to the SMEs
We argue that large banks may have the similar incentives as like as the small banks to deliver loans based on collateral security due to inefficiency in credit evaluation processes which arises from their organizational diseconomies (Canales and Nanda, 2012; Carter et al, 2004)

Summary

INTRODUCTION

Difficulties in getting easy access to finance are treated as one of the foremost barriers to the development of Small and Medium Enterprises (SMEs) in developing countries and in developed countries due to information asymmetry between borrowers and lenders. In this study we try to understand the collateral requirements in terms of fixed assets, personal guarantee and third party guarantee across bank ownership types (private, public and foreign banks) as well as from the bank size perspective for the credit market in Bangladesh during the year 2014. Our empirical results suggest there is no significant difference between small and large banks in terms of demanding for collateral and giving SMEs access to loans. Our results do not support the view that collateralized loans are less riskier than non-collateralized ones and any bank size idiosyncratic difference in credit risk of SMEs. Regarding the collateral segmentation across banks’ sizes and bank ownership types, our regression results suggest that foreign banks demand lower fixed asset’s collateral than public and private banks. We examine the issue of pledging collateral and access to credit from the bank size perspective since small and large banks have different lending techniques.

LITERATURE REVIEW

DATA AND METHODOLOGY

H1: Borrowers with collateral have more access to credit from the bank H2

CONCLUSION