Why do banks ask for collateral in SME lending?

Journal of Business Economics and Management

Belás

Klieštik

et al. 2017

Abstract. The purpose of this paper is to examine the determinants of collateral for small and medium enterprises (SMEs) in the context of Visegrad countries: Czech Republic, Slovak Republic, Hungary and Poland. The data set for this paper was obtained from the Business Environment and Enterprise Performance Survey (BEEPS), which was conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD) from 2012-2014. A binary logistic regression model with different specifications was employed to examine the effect of independent variables on the incidence of collateral. The results show that risky borrowers need to pledge collateral and the reduction of asymmetric information can lower the incidence of collateral for SMEs. Moreover, we find that female borrowers are more likely to pledge collateral than male borrowers are. The results also suggest that loans with a longer maturity are more likely to be collateralized than short-term loans. We find evidence that bank-borrower proximity can alleviate the incidence of collateral whereas bank concentration may increase collateral requirements. Policy makers may consider these results to implement policies that can promote bank competition and can lower collateral requirements for female borrowers. The paper contributes to the ongoing debate on the determinants of collateral.

Section: Empirical Results and Discussionsupporting

confidence: 90%

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

Journal of Business Economics and Management

Belás

Klieštik

et al. 2017

“…This means that collateral is significantly valued by the banks in these countries while lending to SMEs. It is also possible that banks in SKR and Hungary take a conservative approach in lending to SMEs and hence ask for collateral to protect their loan portfolio from bad loans because in the event of defaulted loans a bank can liquidate the securitized collateral and get back the extended loans, which is also proposed by Blazy and Weill (2013). On the other hand, it may signal that SMEs in SKR and Hungary are more credit worthy and they would like to show their credit quality by providing more collateral.…”

Section: Resultsmentioning

confidence: 99%

Determinants of SME Finance: Evidence from Three Central European Countries

Review of Economic Perspectives

Belás

2017

This paper explores the determinants of access to finance for small and medium enterprises (SMEs) in the context of three Central European countries: Czech Republic, Slovak Republic, and Hungary. The data set of the research is obtained from the BEEPS survey, which is conducted by the World Bank and the European Bank for Reconstruction and Development. This paper empirically analyses firms not only from the SMEs point of view, but also shows results for micro, small and medium enterprises separately. Additionally, we have analysed the determinants of access to finance for SMEs at each country level for an in-depth understanding of country-level variations in SME financing. The results indicate that micro firms and firms owned and operated by women are experiencing a shortage of credits from banks. On the other hand, we found a positive relationship between the pledge of collateral and access to finance. With respect to the medium firms, we found evidence that innovative firms have a larger amount of credit from banks. The empirical results also suggest that the loan size increases as the interest rates increase in particular for SMEs on the whole and for micro-firms, although the interest rate is in a negative relationship with the loan size in Czech Republic.

“…It can be that fact that small banks takes collateral from the borrowers to reduce the loan loss; however, collateral incentives does not insist the small banks to provide loans in a risky projects. As it is found that banks use collateral not only to reduce the asymmetric information problem but minimizing loan loss is one of the major concerns for banks to use collateral (Blazy and Weill, 2013;Menkhoff et al, 2006). On the other hand, in our case; it is also possible that small banks have the similar credit expertise as like as the large banks and thus, they provide loans by a strict credit screening process than only to depend on the collateral security.…”

Section: Summary Statistics By Bank Sizes and Collateralmentioning

confidence: 71%

“…On the other hand, research based on ex-ante information shows that the collateral can reduce the adverse selection problem of the loans (Godlewski and Weill, 2011;Jimenez and Saurina, 2009;Hainz et al, 2013;Jimenez et al, 2006;Lehmann and Neuberger, 2001). However, Blazy and Weill (2013) did not fi nd any evidence that the collateral can reduce the ex-ante and ex-post information asymmetry, and hence asking for collateral is not due to information asymmetry, but it may be due to bank internal policy while lending to fi rms. Jimenez and Saurina (2004) fi nd that the loans given based on collateral security are more ex-post riskier than the loans given without any collateral.…”

Section: Literature Reviewmentioning

confidence: 90%

“…Gama and Duarte (2015) and Comeig et al (2015) proposed that when borrowers are pledging collateral they can access loans with lower interest rates and hence; they argue that quality borrowers pledge more collateral to avail loans with lower interest rates. Blazy and Weill (2013) fi nd that high collateral measures the poor quality of the borrowers and hence, interest rate increases with the amount of collateral. Th eory based on the observed risk hypothesis is also suggesting similar results.…”

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Collateral and SME financing in Bangladesh: an analysis across bank size and bank ownership types

Journal of International Studies

Ključnikov

2016

Abstract.We examine the issue of pledging collateral and its eff ect on access to credit, interest rates and credit risk of SMEs fi nancing in Bangladesh with respect to bank size. We also examine the collateral classifi cation (fi xed assets collateral, personal guarantee and third-party guarantee) by bank ownership types to fi nd what types of collateral are preferred by public, private and foreign banks in Bangladesh for lending to fi rms. In addition to that, we examine whether collateral requirements are diff erent between large and small banks as they have diff erent incentives for collateral based lending. Our empirical results suggest that small banks have no additional incentives to provide loans based on the collateral security than large banks. Hence, we did not fi nd any evidence that collateral can increase access to credit for SMEs from small banks. Similarly, we also did not fi nd any eff ect of collateral on interest rates or collateral security can lower the default rates of the SME loans and the results are similar regardless bank size. With regards to collateral segmentation across bank ownership types and bank size, our regression's results suggest that each type of banks has its own preferences about collateral requirements while lending to fi rms. Th erefore, we conclude that depending on bank internal policy commercial banks ask for diff erent collateral, which comply with the best interests of banks.Keywords: Bank Financing, Collateral, Small and Medium Enterprises, Bank Size, Bank Ownership, Credit Risk, Bangladesh. JEL classifi cation: G21, G32, L26, O16Received: December, 2015 1st Revision: January, 2016 Accepted: June, 2016 DOI: 10.14254/2071-8330.2016 Collateral and SME fi nancing in Bangladesh: an analysis across bank size and bank ownership types Rahman A., Rahman M.T., Ključnikov A. (2016)