Financing woes: estimating the impact of MSME financing gap on financial structure practices of firm owners

Abstract

PurposeAccessing formal mainstream finance is a cumbersome process for Micro, Small and Medium Enterprises (MSMEs) of emerging economies. Empirical investigations have connected finance accessibility to financing gap that restricts MSMEs from borrowing through formal channels. The purpose of this study is to explore the influence of financing gap on firms' financial structure (FS) practices. In this regard, the research framework divides financing gap into four dimensions, namely: demand gap (DG), supply gap (SG), knowledge gap (KG) and empathy gap (EG).Design/methodology/approachThe paper adopts a quantitative approach to establish the underlying relationship between the variables. The participants of the self-structured questionnaire survey were 219 MSME owners from manufacturing, trading and service industries. The results are inferred through the partial least squares structural equation modeling (SEM) technique.FindingsThe findings recognise a significant impact of financing gap on the FS practices of firm owners. The financing constraints contributing to KG, SG and EG are found to be extending the unwillingness of firm owners to borrow through formal channels. Further, the results also confirm the influence of financing gap on the pecking order framework (POF) of MSMEs' FS.Practical implicationsThe study offers the perspective and hesitance of MSME owners towards mainstream financing. The key findings are useful for the financial intermediaries and policymakers, who need to be sensitive and proactive in their small business lending process.Originality/valueThe study adds to the limited evidence of various dimensions of financing gap. It also addresses the role of financing gap on the conscious preferences of MSME owners towards the informal source of financing along with the POF.

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“…While these results are consistent with what was found in previous studies, where the study (Masouras, Pistikou, & Komodromos, 2021) proved that those responsible for preparing investment projects approved by the Board of Directors in small and medium-sized companies are employees from outside the company, and they advise the managing director; While in the rest of these organisations it is implemented by the managing director jointly with the board of directors, without using specialised programs for preparing and evaluating investment projects and on many occasions, they only detail it because it is a prerequisite for requesting funding. In institutions, many studies such as (Mittal & Raman, 2021;Mohamad, Mustapa, & Razak, 2021;Nigam, Mbarek, & Boughanmi, 2021) showed the current situation in the majority of small and medium-sized companies not to rely on high-quality feasibility studies in terms of making investment decisions, which reflects that they are developed based on decisions Determined by the events in their environment when they occur, sometimes intuitively, since it is also clear that they are rational in decision-making, they invest in projects that are needed at the moment without a capital budgeting that allows planning in advance, without seeing into the future, and is considered more as an expense operational capital investment; disbursement of funds according to current conditions, without carrying out planning according to production and calculating costs without defining previously planned goals and objectives; They have no future vision. They do not set expectations to guide them in making investment decisions.…”

An Analysis of Pan-India Financial Intermediation Accomplished through the Implementation of Pradhan Mantri Mudra Yojana (PMMY) - Literature Review

“…An analysis is used to explain the Advantage, Benefits, Constraints and Disadvantages [92][93][94][95][96][97][98][99][100] (1) PMMY provides credit support to micro, small and medium enterprises without collateral security [92].…”

“…(2) For private and public banks MUDRA agency allots the target which helps to evaluate the performance of private and public banks [93].…”

“…MSMEs contribute 30% of the GDP of the Indian economy. MSME sector acts as a complement to the big industries [1]. It contributes to about 33% of the manufacturing output and 45% of overall exports.…”

“…The MSMED Act was passed in 2006 to finance small industries. Many micro units are unable to sustain their business operations due to lack of availability of formal credit or finance to this sector, lack of proper training, lack of implementation of newer technologies, etc [1]. Around 63.4 million units throughout the country, MSMEs contribute to around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities and an overall 33.4% of India's manufacturing output PAGE 144 MUDRA OFFERING:…”