The Role of Relationship Lending in SMEs Funding

Abstract

The issue of SMEs funding has been widely discussed by international scholars. One important issue is the access to get funding. Many studies have too narrowly focused on the supply side of the capital. However, To look at the problem of SMEs funding deeply, a review on the demand side should be done further. On the supply side, banks have to deal with the problem of asymmetry information and agency behavior, while on the demand side, owners' control has been the issue. The owners are often found reluctant to add capital to keep their firms in their control. Finally, this review gives the main solution to this problem by promoting relationship lending to minimize the disadvantages that possibly arise in conventional loan transactions. Some steps in creating good and conducive business environment and banking system need to be done to support the idea.

Access to Debt Finance and Performance of Small and Medium Enterprises

“…In their operations, SMEs do not maintain and keep records of their business transactions (Musah, 2017), hence, rendering it difficult to compile reliable financial statements that could measure their performance. Furthermore, the lack of assets that can be used as collateral for their loans discourages financial institutions from lending to SMEs, as they consider them to be more risky (Fuad, 2020). These challenges have led financial institutions to reject SMEs' loan applications, for the reasons that they are more risky and not credit-worthy.…”