Small, micro and medium enterprises financing: Costs and benefits of lending technologies in the Eastern Cape province of South Africa

Orientation: As lack of access to credit hinders small, micro and medium enterprises (SMMEs) success and lending technologies being conduits transmit credit access, more focus must be on the effect of lending technologies on credit rationing.Research purpose: To analyse the extent of credit rationing amongst SMMEs based on lender and firm characteristics.Motivation for the study: In South Africa, SMMEs are funded by different lenders using different lending technologies, but little is known about which ones are more effective.Research approach/design and method: The study takes a quantitative approach. In this study, 321 SMMEs are sampled from 1486 small businesses on the registers of the Nelson Mandela Bay Business Chamber and the Border-Kei Chamber of Business in the Eastern Cape province of South Africa. Financing of SMMEs is captured with a categorical credit-rationing variable. Accordingly, a logit technique is used. The first model captures credit rationing as a binary variable. In the second model, the nature of credit rationing is disaggregated resulting in a four-measure categorical variable.Main findings: Little rationing occurs when asset-based and venture capital methods are used. Microfinance and privately owned development financial institutions have high rationing levels, similar to commercial banks, defeating the purpose of their special existence to address excluded groups. Black people-owned and female-owned businesses are the most rationed. Credit rationing decreases with firm size, but the effects are amplified by race.Practical/managerial implications: To improve SMMEs access to finance, the government should focus on allocating funds to firms using SMMEs’ credit rationing risk profiles.Contribution/value-add: Lending technology, lender type and SMME characteristics relationships indicate that SMMEs can benefit from a well-understood rationing risk profile of firms in the economy. Therefore, policies on support and regulation of the distribution of loan portfolios aligned to empirical rationing risk profiles can improve SMME growth. However, this study has used SMME data from the Eastern Cape province only, one of the nine provinces in South Africa. Thus, the provincial heterogeneity effects are not captured in this study.

Banking in Japan

This chapter focuses on the structure, performance, and some of the defining characteristics of the Japanese banking industry. An analysis of the banking industry in Japan may be of particular interest because of its important role in one of world’s largest economies, its historical orientation to banks in its financial system, its idiosyncratic features related to the nature of the Japanese corporate environment such as its “main bank system,” and its significant transition, which is sometimes idiosyncratic to this country, such as the banking crisis of the 1990s. After providing an overview of the Japanese banking system, we focus on some specific topics on banking in Japan, including the Japanese main bank system, lending technologies in Japan, the Japanese banking crisis, and banking in post-crisis Japan.

Small Business Lending

Small businesses are engines of economic growth that are fueled in large part by bank lending. We examine the roles of technology and regulation in the supply of small business credit. Technological changes increase small business credit supply through the adoption of new hard-information-based lending technologies, such as FinTech lending, as well as by improving existing lending technologies. Technological progress has more modest effects on the processing and transmission of soft information used in relationship lending. Regulatory changes, such as pre-crisis deregulation and post-crisis reregulation, directly affect bank small business lending. The combination of technological progress and geographical deregulation also has resulted in more bank consolidation and competition, both of which have mixed effects on small business credit supply. Lastly, we cover the challenges and mitigating factors in explaining the dramatic drop in small business credit availability during the Global Financial Crisis and the very slow growth during the subsequent recovery.

Impact of Banking Competition on the Use of Soft Information

Over the past 20 years, scholars have discussed the impact of banking competition on the choice between transactional and relationship lending technologies extensively, but no resolution has emerged. To address these questions, this article uses a new measure of relationship lending that accounts for the actual level of soft information that banks use in their loan pricing. With this new measure, the analysis reveals that banks prefer to implement relationship lending technology when competition is weak. In addition and in accordance with extant theoretical conclusions, the shape of the relationship between competition and relationship banking is nonlinear and concave.

The relationship between small and medium-sized social enterprises and banks

Purpose The purpose of this paper is to perform a critical analysis of the relationship between small- and medium-sized social enterprises (SMSEs) and banks. Based on the conceptual framework for the analysis of SME’s credit availability developed by Berger and Udell (2006), this study aims to contribute to the current debate in two ways: first, outlining the characteristics of the lending technologies currently used by banks and financial institutions to evaluate SMSEs when they apply for credit; and second, discussing, based on the results of the empirical analysis, the coherence of these systems from the social ecosystem perspective and identifying areas for possible improvement. Design/methodology/approach The paper develops a conceptual framework based on the model proposed by Berger and Udell (2006), which defines the characteristics of lending technologies that banks use to evaluate SMEs, and applies it to the case of SMSEs. To study the interplay of these lending technologies, the empirical analysis is based on a case study of five Italian banks. Data are collected from multiple sources to capture key dimensions of the problems analyzed. Findings The paper provides empirical insight about the relationship between SMSEs and banks. The Italian case shows that the current lending infrastructure must be revised to support SMSE credit availability, and government policies affect the national financial institution structure. The relationship between SMSEs and Italian banks remains underdeveloped. Social implications The research supports the scaling up of social business. Originality/value This paper fulfills an identified need to study how social enterprises credit access can be enabled.

Post-Conflict Reconstruction, Microfinance and Democratic Engagement

This paper presents results from a study of the comparative effects of microfinance group lending, and individual lending technologies on measures of women’s political capital in a fragile conflict-affected setting. Based on a quasi-experiment in Liberia, the two lending technologies were found to have significant effects on different measures of women’s political capital, though the effects were greater for the group lending technology than those of the individual lending. The different effects are due to the program orientation of the two lending technologies which facilitate the development of more resources for communal activism and democratic values among group lending than individual lending borrowers. This impact of this effect will be minimal if factors that constrain the women’s ability to invest their political capital are not addressed. Although more evidence would be required in order to generalize these results, they provide us insights about the political contribution of an economic intervention to post-conflict reconstruction.