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

Abstract

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)

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