Working Paper Series: Special Edition of 2016 to 2018 Interns

Berger & Udell (2002) argues that small banks turn to “soft information” in assessing firms’ creditworthiness and the character of owners. This is in an effort to reduce the problems associated with information asymmetries in lending. However, this type of technology may suffer from (1) shocks to economic environment (2) transferability of relationship 2 and (3) agency problem between loans officers and firms, leading banks to contract lending to the small business sector. Berger & Udell (2004) further argues that lending infrastructure may directly affect SMEs ability to access credit, confining the degree to which diverse technologies may be engaged in lending. Presbitero & Rabellotti (2014) using probit analysis finds that larger, older and less export-oriented firms had a higher propensity to demand bank credit and was less likely to be discouraged from applying or financially constrained. In terms of access to credit, aside from firm characteristics, credit market structure was found to be a significant factor in explaining its heterogeneity. On the contrary, Okura (2009) using probit analysis, found that the probability of a SME accessing bank credit for working capital was significantly lower compared to larger firms with export rights. An ordered probit model was estimated by Schiffer & Weder (2001) their findings suggested that small firms and medium firms have greater problems in accessing finance in Europe than in the USA. In general, it was found that SMEs ability to obtain bank credit stemmed mainly from internal factors such as financial results, ownership, size etc. For the Caribbean in particular, negative coefficients was observed for dummies of small firms, which is indicative that small firms face more problems than larger ones. In Latin America and the Caribbean, medium sized firms suffered more from taxes and regulations compared to larger firms. Using cluster analysis techniques on a sample of Mauritian manufacturing SMEs Padachi & Howorth (2012) found that younger firms particularly those in their development and nascent stages had the most difficulty in sourcing financing. Furthermore, significant information costs were another decisive factor that prevented SMEs from obtaining financing from traditional sources. On the other hand, findings found limited evidence to support the literature that older firms tend to hold larger fixed asset bases, which can be used to secure advances.

2 This relates to the verification, observation and transmitting of information.

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