High Collateral Requirements Research Articles

A study on analysis of financial challenges of Small and Medium Sized Enterprises (SMEs) in international markets with special reference to blantyre commercial Center-Malawi, Central Africa

Small and Medium-Sized Enterprises (SMEs) play a pivotal role in economic development, particularly in emerging markets like Malawi. However, these enterprises face significant financial challenges when venturing into international markets from hubs such as Blantyre Commercial Centre. This study examines the multifaceted financial barriers that impede SMEs' ability to compete effectively in global trade. This study employs a mixed-methods approach, incorporating quantitative data analysis from SME financial records and qualitative insights gathered through interviews with key stakeholders, including SME owners, financial institutions, and government officials. The study focuses on identifying and analyzing the primary financial challenges encountered by SMEs in Blantyre, Malawi, including limited access to finance, high transaction costs, exchange rate volatility, and stringent regulatory environments. Findings reveal that SMEs in Blantyre face substantial hurdles in accessing financing due to high collateral requirements and exorbitant interest rates imposed by traditional financial institutions. Moreover, the high costs associated with currency conversion, international shipping, and compliance with diverse regulatory frameworks amplify the financial burden on SMEs, constraining their capacity for international expansion and competitiveness. The study underscores the urgent need for tailored financial solutions and supportive policies to address these challenges effectively. Recommendations include developing specialized financial products that cater to SME needs, negotiating preferential trade agreements to reduce transaction costs, and enhancing SME capacity in financial risk management and regulatory compliance. By addressing these financial barriers, stakeholders can foster a more conducive environment for SME growth and internationalization in Blantyre Commercial Centre, thereby contributing to sustainable economic development and inclusive prosperity in Malawi and Central Africa.

Relationship Banking, Collateral, and the Economic Crisis as Determinants of Credit Risk: An Empirical Investigation of SMEs

Abstract This study examines the impact of relationship banking and collateral on the probability of firm loan default in Kosovo. Using a sample of 2,320 loan-level data from an individual bank credit register, findings indicate that stronger firm-bank relationships reduce the probability of default, and tighter credit policies regarding higher collateral requirements and interest rates have the opposite effect. Re-specifying the model to control for the banking sector concentration Hirschman-Herfindahl Index (HHI) and the Net Interest Margin (NIM), the firm-bank relationship is no longer statistically significant. Results show that the crisis negatively impacts credit risk, while HHI positively affects the probability of loan default. This evidence suggests that banking relationship matters only in competitive markets. To test the potential interaction effect between relationship banking and collateral, Fairlie’s (1999) decomposition technique is deployed. Our results imply that high concentration levels in the banking sector render firm-bank relationships relatively less important. This is of utmost importance for SMEs, banks, and policymakers.

MICRO, SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE CONSTRAINTS IN ETHIOPIA: DEMAND SIDE ANALYSIS

Despite the immense importance of micro, small and medium enterprises (MSMEs) to job creation and the alleviation of abject poverty, significant numbers of MSMEs cannot realize their full potential because of limited access to finance and other factors, mostly in developing countries. The study investigates micro, small and medium enterprises' access to finance constraints in Ethiopia from a demand-side perspective. This study employed a descriptive analysis using survey data collected from 814 randomly selected sample enterprises. The results show that about 76% of the MSMEs were established by initial capital majorly generated from their own savings, family or friends, Equub, and saving and credit cooperatives among others. The remaining 24% accessed their initial capital from formal financial institutions. From the total, 39.4% of MSMEs did not apply for loans due to high collateral requirements, complex application procedures, unfavorable interest rates, insufficient loan size, maturity, and grace period, and lack of transparency. The study results also reveal that 22%, 46%, and 32% of the MSMEs are partially credit constrained, fully credit constrained, and non-credit constrained, respectively. The difference between the average demand and the loan supplied is estimated to be 3241, 11444, and 30949 USD for each micro, small, and medium-sized enterprise, respectively. The total estimated finance gap for all MSMEs is 31.7 billion USD. The findings of this study suggest the establishment of public credit guarantee schemes, cash flow-based lending, and psychometric testing for credit scoring and automating the MFIs' services to improve MSMEs' access to finance.

Financial Pattern of Small and Medium Enterprises (SMEe) of Pakistan

The study explores the financial pattern of Small and Medium Enterprises (SMEs) in Khyber Pakhtunkhwa (KP) province of Pakistan. Financial pattern including overall management of finances sources, the obstacles in financing and to identify the most lucrative sources of financing. The data is gathered through 200 questionnaires distributed in four districts, namely, Peshawar, Mardan, Swat and Haripur of Khyber Pakhtunkhwa using the snowball sampling technique. The reason for choosing KP province is that it has a meager proportion of about 5% in total 3.2 million SMEs in Pakistan. The research explores the financial reasons for such a low number of SMEs in KP. The results of the study show that major problem to SMEs is an access to formal financing sector including high interest rate, high collateral requirements and the complex documentation process to get loans. The major source of financing in KP is equity capital and re-invested profit made by business. The findings also indicate that majority of managers and owners of SMEs are dissatisfied from the banks and policies of Small and Medium Enterprises Development Authority (SMEDA). The study suggests that SMEDA should have clear and transparent policies and vision to fulfill the financial needs of SMEs from the formal financial Institutions. Similarly, banks should tailor their products and services according to the needs of SMEs.

Only the brave: improving self-rationing efficiency among discouraged Swiss SMEs

We conduct a survey among 1922 Swiss SMEs to analyze their access to bank loans. Credit-constrained SMEs are six times more likely to be discouraged than rejected. The most dominant reasons for being discouraged are too high collateral requirements, cumbersome application procedure, and the expectation of being turned down. Through a unique feature in the Swiss banking market, we also find new evidence for the importance of a strong firm–bank relationship. We challenge the assumption that discouraged borrowers are very similar to rejected borrowers. Our results indicate that the group of discouraged borrowers is more similar to the denied borrowers than to the group of approved borrowers, but only with respect to firm characteristics. For variables describing business development and firm–bank relationship, discouraged SMEs have less in common with credit-constrained firms than with their unconstrained counterparts. Even with a conservative prediction, about 60% of the discouraged firms would have obtained a bank loan if they had applied for one. The self-rationing mechanism observed is thus rather inefficient, and banks and policy makers should think about how to foster SMEs’ courage to apply for the bank loans they need.

How environmental performance affects firms’ access to credit: Evidence from EU countries

In response to climate change and environmental degradation, the European Union has recently proposed a long-term strategy targeting a climate-neutral economy by 2050.Sustainable finance plays a crucial role in reducing a country's production-generated emissions since limited access to credit hampers firms from investing in pollution abatement technology. Additionally, high collateral requirements may force firms to replace pollution abatement investment with tangible assets, which are often preferred as collateral in debt financing. Using survey data from firms in ten EU member states, this study investigates the impact of a firm's environmental performance on bank lending decisions and collateral requirements. Our empirical findings suggest that, for the sample countries as a whole, eco-friendly firms are more likely to receive a line of credit and less likely to be imposed collateral requirements. For collateralized loans, desirable environmental performance reduces the odds of high collateral value relative to loan size. Sustainable finance may depend on the levels of economic/financial market development. There are seven EU new member states (NMS) in our sample. Although financial institutions in the EU NMSs reward eco-friendly firms when they make lending decisions, they are less likely to consider environmental performance when imposing collateral requirements. These empirical findings hence provide insightful policy implications for improving the practices of sustainable finance.

Development of SME and increasing income of the population through Islamic financing

The level of financial inclusion in Uzbekistan remains low: the majority of households and firms, rather than using formal finance, save and borrow informally, and few use digital finance products. Both indicate the high cost of finance as the top reason for not using it. Secondly, households, which are mostly Muslim, declare that religious reasons prevent them from using formal finance, as only conventional finance is available. Unlike households, firms report that complex application procedures and high collateral requirements are the second and third most important reasons for not using formal finance. The purpose of this paper is to examine the short-run and the long-run relationships between Islamic banking development and economic growth in the case of Uzbekistan.

Participation, Income Effect and Challenges of Village Savings and Loans Program in Garu and Tempane Districts of the Upper East Region, Ghana

Village Savings and Loans Associations (VSLAs), have the aim of reducing poverty and creating assets to rural dwellers who have limited access to formal finance due to high collateral requirements. However, since the implementation of VSLAs in the Garu and Tempane districts for over a decade, there is inadequate evidence as to the impact of VSLAs on the lives of the participants. Not only that, there is the need to find out the current and anticipated challenges faced by the participants in the program. This study analyzed the effect of VSLAs on the income of households in Garu and Tempane districts. Data was collected from 100 respondents, 50 direct beneficiaries and 50 non beneficiaries from 3 and 2 communities in Garu and Tempane districts respectively. A Heckman treatment effect model was used to analyze the determinants of participation and the effect of participation on income. The results showed that participants of the VSLA program had an annual income of about GH₵ 2016.60 more than the non-participants. Decision to join VSLAs is mainly influenced by age, the years a respondent spends in the community, the number of active labor force in a household and whether a respondent is a native or migrant. However, based on the challenges identified, it is recommended that the government and other institutions interested in rural development should institute appropriate policies that will help enhance participation in the program. Also, the associations should enforce tougher sanctions on members who absent themselves from meetings without prior notice.

Predicting payment migration in Canada

Canada has two core payment systems for processing funds transfers between financial institutions: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These will be replaced in the next few years by three new systems: Lynx, the Settlement Optimization Engine (SOE) and the Real-Time Rail (RTR). We employ historical LVTS and ACSS data and use the discrete choice demand estimation approach to uncover end users’ and financial institutions’ preferences when deciding which payment instruments and payment systems, respectively, to use. Based on the estimated preferences revealed, we conduct various counterfactual analyses to predict the volume and value shares of the future payment systems. The results show that small-value LVTS payments will likely migrate to the SOE. Also, in the short run, about CA$10 000 billion of LVTS and ACSS payments per year is anticipated to migrate to the RTR if not subject to maximum transaction values. These migration patterns raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.

Does information sharing matter? Cross-country evidence on foreign bank presence

This article empirically examines the effects of foreign bank presence on firms’ access to credit, conditional on the level of information sharing in an economy. Using firm-level survey data for 66 emerging and developing countries, we rely on a probit model to identify this impact. Our results show that an increase in foreign bank presence is associated with higher financing constraints for firms and is associated with unfavorable interest rates and higher collateral requirements. However, we find that information sharing partially offsets the negative effect of foreign bank presence on business access to credit. The magnitude of this offsetting effect varies with the type of information sharing; whether through a privately-owned credit bureau or public credit registry.

What Drives Bank Lending Spreads and Collateral Requirements in the Kyrgyz Republic

Limited access to finance and its high cost have contributed to relatively low levels of private investment and subpar growth in the Kyrgyz Republic. Interest rate spreads have moderated in recent years, but remain high from both a regional and global perspective. At the same time, collateral requirements applied by banks are onerous and also constrain the quantity of credit supplied. This paper identifies a range of factors that could lower spreads in the Kyrgyz Republic: more competition, higher capital, lower credit risk, larger loan size, lower deposit rates and external funding costs, as well as a stronger legal framework. Lower operating costs appear critical to reduce relatively higher spreads for small and medium-sized banks. At the same time, a stronger legal framework and greater transparency on borrowers’ creditworthiness would help reduce the high collateral requirements. Reforms in all these areas would support greater financial inclusion in the aftermath of the pandemic, and could thus be a key source of sustainable and inclusive growth in the Kyrgyz Republic.

Relationship lending: A source of support or a means of exploitation?

Using a dataset from the State Bank of Pakistan containing each and every commercial loan generated in the economy from 2006 to 2013, we find that, on average, a longer relationship length is associated with lower risk premiums but higher collateral requirements. However, further examination paints a far more complex picture. The impact of relationship length on risk premiums and collateral varies substantially with the type of lender, as well as the type of borrower. We argue that conflicting empirical findings on relationship lending are the result of using datasets limited to certain types of borrowers or financial institutions.

Obstacles in SME Financing: The Case of Masko

Small and medium sized enterprises (SMEs) have many benefits for the economy. They employ workforce, make investments, and pay taxes. Most of the time, they create innovative products that enhance competition. Therefore they can contribute to economy by providing innovative goods and services to the larger companies. However, they have short credit records and high risk as no concrete business is available. This kind of structure makes it difficult to finance projects if they don’t have sufficient shareholders’ equity. Bank loans are often not available, or they have high costs, bureaucracy and collateral requirements. Capital markets are also not accessible or provide low pricing for company stocks. Alternatives such as angel capital and crowd funding are available but they also have their limitations. This research has the goal to identify obstacles in SME financing and propose solutions in this field. A survey is made in Masko, an organized industrial zone in Ikitelli region, Istanbul, Turkey. The number of completed surveys are 416. There are information on sampling, scaling, reliability, factor analysis and regression analysis in the research. With the regression analysis the main hypothesis of the research: Solution Proposals for Financing of SMEs is being affected by other dimensions of the study. is accepted. The significant dependent variables that affect SME Financing are the frequency of using financial vehicles and Information on Financial Vehicles. A discussion section on research findings elaborates these results as well as some demographic variables such as gender, age, education, business operating period, having a finance department, obtaining loans and duration of loans. Some of the solution proposals available in the conclusion are lifelong learning and innovation, adjustments to the banking system, tax incentives, and transparency. Keywords: Corporate Finance, Furniture Industry, Regression Analysis, Small and Medium enterprises DOI : 10.7176/RJFA/10-20-11 Publication date :October 31 st , 2019

An institutional view on access to finance by Tanzanian women-owned enterprises

We investigate the limited use of bank and microfinance loans by Tanzanian female entrepreneurs. Using survey data, we observe that female entrepreneurs mainly use informal sources to finance their businesses. We analyze how “perceptions” of gendered cognitive and normative institutions determine whether a female entrepreneur applies for a formal loan. Following results stand out: first, we find that high collateral requirements, interest rates and personal guarantee requirements make formal loans unattractive. Second, female entrepreneurs only apply when they expect to be successful. Since they “perceive” access to finance to be more problematic for women, female entrepreneurs are discouraged from applying. Third, female entrepreneurs “perceive” they have insufficient access to financial knowledge which again will prevent them from applying. This study contributes to theory by exploring the effect of entrepreneurs’ perceptions of the institutional business environment on financing behavior. Furthermore, we show that the low use of formal loans by female entrepreneurs is primarily demand-driven, which calls into question the effectivity of policy recommendations aiming to increase supply of formal loans.

Determinants of New Small and Medium Enterprises (SMEs) Access to Bank Credit: Case Study in the Phu Tho Province, Vietnam

Small and medium-sized enterprises (SMEs) play a very important role in the Vietnamese economy. Specifically, new SMEs are seen as a suitable solution to cope with development issues such as poverty and a high unemployment rate. In Vietnam, a high SME failure rate is due to lack of capital and poor managerial experience of owners. Most existing research on SMEs focuses on well-established stages, and less attention is paid to new SMEs. This paper investigates the determinants of credit access by SMEs existing for less than forty-two months in the Phu Tho province located in Northern Vietnam. The quantitative data were collected from 259 SMEs in 2015. The regression analysis reveals that a business plan, the firm size, and networking (emotional trust, knowledge trust, and approachability) are the main drivers of access to bank loans by new SMEs. About 64% (165 observations) of new SMEs in our sample did not get any bank loan caused by high collateral requirements, unfavorable interest rate, poor business plans, limited networking, and lack of government support. The results also indicate that, among the selected explanatory variables, having a concrete business plan significantly affects the bank loan ratio (total bank loans over total capital). Based on these results, we derived political implications.

Markups, Productivity and the Financial Capability of Firms

We extend a framework of monopolistically competitive firms heterogeneous in productivity and with endogenous markups (as in Melitz and Ottaviano, 2008) to incorporate the presence of financial frictions. Before producing, firms need to obtain a loan necessary to cover part of production costs, for which they have to pledge collateral in the form of tangible assets. In addition to productivity, firms are also heterogeneous in their financial capability: some firms have access to collateral at lower costs. As a result, financial capability and collateral requirements enter together with productivity in the expression of the equilibrium firm-level markup. At the aggregate level, the model shows that tighter credit constraints in the form of higher collateral requirements mitigate the pro-competitive effect of trade. We validate our theoretical results capitalizing on a representative sample of manufacturing firms surveyed across a subset of European countries during the financial crisis. Guided by theory, we estimate for each firm financial capability, TFP and markups. We then employ those estimates to structurally retrieve from the model a firm-specific measure of collateral requirements (a proxy of credit constraint), and test our main propositions.

Chasing credit: the bane of small and medium scale enterprises in Assin North Municipality, Ghana

This article assesses the institutional arrangements for sourcing credit and constraints facing SMEs in accessing credit to finance their operations in Assin North Municipality of the Central Region, Ghana. A descriptive cross sectional survey research design was employed in the study. A sample size of 80 respondents was drawn for the study and questionnaire was the instrument used for collecting the data. The study reveals that friends or family members were the principal sources of funding available for SMEs. Also, high collateral requirements, high level of taxation and competition from large scale businesses for finance and market were the major constraints facing the growth and expansion of SMEs. These challenges have stifled the growth and expansion of SMEs in the municipality. It is recommended that a special fund be established by the government and other stakeholders in the finance sector to respond solely to the credit needs of SMEs in the municipality.

Factors Affecting the Growth and Development of SMEs: Experiences from Kosovo

Small and medium enterprises are becoming increasingly important for the creation and development of a modern, dynamic and knowledge-based economy. This is because of their capacity to promote entrepreneurship and entrepreneurial skills, and because of their ability to be flexible and adapt quickly to a changing market, and to generate new jobs. SME sector is the backbone of the economy in countries with higher income, while it is less developed in the countries with the low incomes. Organization for Economic Cooperation and Development (OECD) reports that more than 95% of enterprises in the OECD area are SMEs. These enterprises employ about 60% of private sector workers, make a major contribution in the field of innovation and support regional development and social cohesion. Also, SMEs in most low income countries give significant contribution to GDP growth and the creation of new jobs. In Kosovo SMEs represent more than 99% of the total number of enterprises and their share in GDP amounts to more than 50% (CBK, 2011). For this reason, the identification of external factors affecting the development of SMEs in Kosovo is very important, in order to take all the necessary steps to reduce or remove barriers and create new opportunities for these enterprises. This research focuses primarily on the impact of external factors, with special emphasis on access to finance for Small and Medium Enterprises (SMEs) in Kosovo. External factors such as access to finance, competition, corruption, and government policies have very important impact in the development of SMEs in Kosovo. Facilitating access to finance is essential to set up a favorable environment to develop SMEs. However, in general, SMEs in developing countries face numerous barriers to funding, although this problem is not unknown even in developed countries. Barriers that face SMEs usually relate to high administrative costs, high collateral requirements and the lack of willingness of banks to lend to SMEs. Raising the level of awareness of their role and availability of access to finance for SMEs can improve economic conditions in developing countries by promoting innovation, growth of GDP and reduce unemployment. DOI: 10.5901/mjss.2013.v4n9p701

Lending to uncreditworthy borrowers

We study optimal lending behavior in situations where borrowers’ outside options increase with their creditworthiness. Creditworthiness is private information of borrowers. Lenders use collateral as a screening mechanism to address this adverse selection problem. A lender seeking to attract creditworthy borrowers with high reservation payoffs (while screening out uncreditworthy types) must offer contracts with sufficiently low interest rates and, consequently, high collateral requirements. Because higher collateral requirements raise screening costs, however, lenders favor pooling uncreditworthy borrowers over screening them—in essence, a lowering of credit standards. Lending costs determine break-even offers that rival incumbents can offer borrowers. Accordingly, a lender faces borrowers whose reservation payoffs depend on the lender’s cost advantage over rival incumbent lenders. Our results imply that screening is more likely to occur in markets with a greater disparity in lending costs. Conversely, when funding markets are intensely competitive, lenders are more likely to resort to pooling. This paper also rationalizes the phenomenon of cream-skimming by outside (foreign) lenders as an equilibrium of the model. Surprisingly, we find that the presence of an informed rival actually facilitates cream-skimming by an uninformed lender.

Lending to Uncreditworthy Borrowers

We study optimal lending behavior in situations where borrowers’ outside options increase with their creditworthiness. Creditworthiness is private information of borrowers. Lenders use collateral as a screening mechanism to address this adverse selection problem. A lender seeking to attract creditworthy borrowers with high reservation payoffs (while screening out uncreditworthy types) must offer contracts with sufficiently low interest rates and, consequently, high collateral requirements. Because higher collateral requirements raise screening costs, however, lenders favor pooling uncreditworthy borrowers over screening them —-- in essence, a lowering of credit standards. Lending costs determine break-even offers that rival incumbents can offer borrowers. Accordingly, a lender faces borrowers whose reservation payoffs depend on the lender’s cost advantage over rival incumbent lenders. Our results imply that screening is more likely to occur in markets with a greater disparity in lending costs. Conversely, when funding markets are intensely competitive, lenders are more likely to resort to pooling. This paper also rationalizes the phenomenon of cream-skimming by outside (foreign) lenders as an equilibrium of the model. Surprisingly, we fi nd that the presence of an informed rival actually facilitates cream-skimming by an uninformed lender.