The Effect of Bank Lending and Private Equity Investment Criteria on Smes Access To Finance: A Demand and Supply Side Syntheses

No Thumbnail Available

Date

2022-03-02

Journal Title

Journal ISSN

Volume Title

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.

Description

Keywords

Citation