The Effect of Bank Lending and Private Equity Investment Criteria on Smes Access To Finance: A Demand and Supply Side Syntheses
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Date
2022-03-02
Authors
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Journal ISSN
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Publisher
A.A.U
Abstract
This study analyzed the effect of bank lending and private equity (PE) firm investment criteria on
SMEs' access to finance. The study followed a deductive approach, both explanatory and
descriptive designs, survey method, and questionnaire as data collection instrument. A total of 270
bank managers and credit officers and 8 PE investment and business analysts as well as 200 SMEs
owners and managers established the study setting. Hayes logistics regression was used to analyze
the direct and indirect effects of lending criteria on manufacturing SMEs access to Bank finance
and descriptive statistics to rank PEs’ SME investment criteria. The study found a full mediation
role of adverse selection in the relationship between SMEs access to finance and 4 aspects of bank
lending criteria. However, moral hazard partially mediated the relationship between SMEs access
to finance and the other 2 aspects of bank lending criteria. Regardless of having significant
mediation effects, the logistics regression indicated SMEs access to finance didn’t increase
compared to the previous year. On the other hand, the descriptive analysis of PE’s response
indicated SMEs’ managerial, product, market, and financial considerations influence their
investment decisions on SMEs. The relative importance index showed that both PEs and Banks
give priority to entrepreneurial character in screening SMEs for financing. Besides, the demandside
analysis
showed
that
collateral
and
capital
requirements,
and
financial
consideration
are
the
most
important criteria influencing access to Bank and PE finance, respectively. The study
concludes SMEs access to finance doesn’t show improvement as a result of not-fulfilling mainly
Banks' non-performance-related criteria and the lifestyle entrepreneurship nature of manufacturing
SMEs in Ethiopia to attract PE investment. The study also concludes that while the existing
collateral and capital related criteria directly influence Bank SME financing decisions, character,
activity, condition, and capacity do not. This implicates the need for revising the existing Bank
SME lending criteria.