The challenges faced by small and medium enterprises (SME's) in obtaining credit / Fathimath Azleena Ali

Abstract

Small and Medium Enterprises (SMEs) are an important part of any economy (Ayyagari, Beck and Demirguc-Kunt, 2007). This is also the case in Maldivian economy as it comprises more than 97% of the Maldivian business establishment as well as more than 68% of the Gross Value Added to Maldivian economy (National Bureau of Statistics, 2013). Despite their importance, SMEs around the world are continuously subjected to various challenges when acquiring credit facilities. As a result, SMEs are constrained in their ability to acquire credit for the growth and development of their business.
Theory on the subject suggests that these challenges are present in all countries around the world, Some of these challenges include business collateral requirements, personal equity requirements, complexity of the documentation and paperwork required, interest rates, credit history, loan repayment history, religious and social beliefs, as well as external factors. Additionally, the issue of information asymmetry was seen as a significant factor that contributes to these challenges.
The objective of this research therefore, is to find if these issues are prevalent in Maldives and to what extent, as well to identify if information asymmetry is a significant factor that contributes to the financing challenges. Additionally, the effectiveness of government credit schemes to address these issues is also explored. Data was gathered using a questionnaire that collected data from the perspectives of both SMEs and Banks.
The results shows that the challenges identified from the theory are prevalent in Maldives at a significant level. All the challenges were noted has prevalent at a high significance level, except loan interest rates, which was not perceived as a significant challenge. The issue of information asymmetry was also found to be significantly affecting SME's ability in securing a loan from banks. It was also noted that there is no correlation between the challenges perceived by banks compared to the challenges perceived by SMEs. Finally, significant evidence was not found to suggest that government credit schemes are having any effect on alleviating these challenges or otherwise.
This research provides valuable evidence to policy makers regarding the status of SME financing challenges in Maldives. However, due to the limitation of the sample size used for SME perspective, there is not enough evidence to suggest that these findings reflect the view of all SMEs in Maldives. Factors not discussed in theory are also not considered during the research. Finally, recommendations are also given based on the findings from this research.