Modeling the Behaviour of Corporate Demand for Credit in Mauritius before and after the Global Financial Crisis Under Conditions of Excess Liquidity by Banks

Chakeel Coomar Prayagsing

doi:10.14738/abr.85.8165

Abstract

This Paper proves that the global financial crisis (GFC) has had a major influence in altering the pattern and subsequent demand for corporate finance in Mauritius. By applying probability models, it is found that bonus issuance is a key factor that influences the demand and supply for both debt and equity financing. Firms consider debt repayment variable of upmost essence to loan application and provision responses. Large companies, comprising of entities falling under the wing of the manufacturing, industrial and retail sector found ease in obtaining bank loans prior to the crisis due to the positive rating and nature of their respective businesses. Conversely, small and medium enterprises found themselves relaying heavily on startup loans, of limited amounts, as they failed to qualify for greater loan applications due to their inability to meet the adequate requirements. Corporate entities on their end, had a much greater preference for equity financing prior to the crisis. The aftermath of the crisis nevertheless negatively influenced the pattern of financing for all categories of businesses. A more regulated framework was adopted by banks, on an international level which caused banks to be more cautious and limited in providing finance to entities. Even with excess liquidity, banks have declined demand for bank loans.

Highlights

One important gap in the present literature is an understanding of how firms adjust their demand for credit in the aftermath of the global financial crisis (GFC)
Following the GFC, a decline in bank loans is noted. It can be found from the analysis that the global financial crisis has had a major influence in altering the pattern and subsequent demand for corporate finance in both Model 1 and Model 2
Large companies, comprising of entities falling under the wing of the manufacturing, industrial and retail sector found ease in obtaining bank loans prior to the crisis due to the positive rating and nature of their respective businesses

Summary

INTRODUCTION

The overall gearing ratio of firms has shown an increasing trend over the years, implying that most companies in the different industries are employing more long-term debts and preference shares, in relation to their ordinary equity issued and savings. For instance, are lowly geared but exhibits high debt/equity ratios, logically implying that these firms have either increased their reserves by declaring lower dividends or decreased the issue of preference shares. During post GFC, the banks had adopted a financial bottleneck policy whereby they have been reducing credit facilities available, firms had to resort to equity in order to raise finance. This in turn led to the decrease in gearing ratios. 1 if firm apply for loan; 0 otherwise 1 if firm apply for loan; 0 otherwise 1 if firm apply for equity; 0 otherwise 1 if firm apply for equity; 0 otherwise 1 if firm loan application is successful; 0 otherwise 1 if firm loan application is successful; 0 otherwise 1 if the firm is an affiliate from corporate group; 0 otherwise

Bank rejects Dividend Repayment

Leasing Hotel

Findings

CONCLUSION