Working Paper Series: Special Edition of 2016 to 2018 Interns

between bank loans and commercial credit. This is indicative of the serious asymmetric information phenomena between banks and SMEs.

Using a probit model Holton et al. (2012) estimates credit and demand supply conditions for SMEs in Europe. The authors found that larger and older firms have a lower probability of being rejected credit. This is mainly attributed to the fact that these firms have a wider array of options when it comes to accessing financing. Zhao et al. (2006) found that firm size was determined to be the most significant factor affecting SMEs ability to secure credit. While Wang(2016) observed that firm size and age were negatively correlated with financing constraints implying that larger and older firms perceive access to credit as less of a problem. Holden & Howell (2009) argues that high collateral requirements, high interest rates, exorbitant transaction costs, and underdeveloped financial sector reduces access to credit and often makes it difficult for entrepreneurs in the Caribbean to access financing for their businesses. Beck (2007) contends that higher transaction costs and default risks as a result of information asymmetries associated with SMEs, leads lenders to ration credit, thus implementing non interest screening devices such as collateral requirements and requesting audited financial statements. This makes it more difficult when it comes to lending to SMEs, particularly in developing countries, as most of them are unable to provide collateral or produce audited financial statements. Zhao et al. (2006) estimated a multiple regression analysis to determine factors affecting SMEs ability to borrow from banks in the Chengdu City. Findings revealed that relationship with banks especially close relationships, size of firm, ability to provide collateral and willingness to comply with banks clauses were among the key factors in determining whether SMEs were able to secure credit from a bank. Furthermore, the authors argued that the overall findings were indicative of the presence of information asymmetry between borrower (SMEs) and banks. This is attributed to the small and medium size of most SMEs and their inability to provide collateral, lack of credit histories, inadequate compiled financial registers and poor record keeping which makes lending to them undesirable.

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