The microstructure of bank lending to SMEs: evidence from a survey of loan officers in Nigerian banks

Ekpu, Victor Uche (2015) The microstructure of bank lending to SMEs: evidence from a survey of loan officers in Nigerian banks. PhD thesis, University of Glasgow.

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The opacity and riskiness of small and medium sized enterprises (SMEs) make them an interesting area for the study of banks’ lending practices and procedures. SMEs in Nigeria, like in many low and middle-income economies, face financing difficulties because they are relatively young, inexperienced and informationally opaque. Since the consolidation of the Nigerian banking industry in 2006, the share of commercial bank loans to SMEs has declined markedly despite the fact that Nigerian banks are well capitalized and are among the largest players in Sub-Saharan Africa. The researcher conducted a questionnaire survey to investigate the microstructure of SME lending decisions, policies and practices in Nigerian banks. Using a sample of 121 Nigerian bank lending officers, this study specifically investigates three research questions: (1) the demand and supply side constraints to bank involvement with SMEs (2) the determinants of loan contract terms (i.e. risk premium and collateralisation), and (3) the economic value to banks from investing in customer relationships.

Results from analysis of survey responses reveal that the high incidence of loan diversion, weak management capacity and the inability of SMEs to service debts are chief contributory factors to the riskiness of SME loans in Nigeria. On the supply side, the high transaction costs associated with processing and monitoring small loans impact negatively on lending profitability. There are also constraints posed by regulation and the business environment. Most notably, the recent rise in yield on competing assets, such as government treasury bills, has led to the crowding out of private sector lending as Nigerian banks hold a sizeable proportion of their assets in relatively safer government securities, which tends to lower their appetite for lending to SMEs. The risk profile of the SME sector is further enhanced by poor information economics, infrastructural deficiencies, the inefficient credit referencing on business loans as well as the inability to enforce loans contracts due to legal and judicial constraints.

The econometric results show that the determinants of risk premium on SME loans are largely connected with factors that underline the opacity and riskiness of SMEs in Nigeria. Customers with longer relationships with their bank tend to benefit from lower interest rates. What determines the likelihood of requesting collateral from SMEs varies significantly from bank to bank and is likely to be connected to the lenders’ specialization as well as differences in the business model and lending technologies used. Loan size, borrowing firm’s age and credit rating also determine the amount of collateral pledged.

There is also evidence to suggest that the predominantly centralised lending strategy in Nigerian banks impacts negatively on the accumulation of soft information by loan officers, implying that not all information collected by the loan officers is utilised in taking lending decisions. However, the proprietary information (or knowledge) loan officers gather through frequent communication and interaction with their customers is likely to yield some potential benefits for Nigerian banks. The most dominant is the high probability that customer satisfaction from bank relationships will generate repeat business for the banks.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Additional Information: I have drafted a book manuscript from some sections of my thesis that has now been approved for publication in the SpringerBriefs in Finance series and is currently in production. The title is - Determinants of Bank Lending to SMEs: A Survey of Demand Side and Supply Side Factors. This thesis was supported by funding from the Scottish Institute for Research in Economics (SIRE). The survey project was supported by funding from the Adam Smith Business School.
Keywords: Bank lending, SMEs, demand side, supply side, risk premium, collateral, soft information, loan officers, relationship lending, Nigerian banks
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
Supervisor's Name: Paloni, Dr. Alberto
Date of Award: 2015
Depositing User: Dr Victor Uche Ekpu
Unique ID: glathesis:2015-6811
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 03 Nov 2015 13:57
Last Modified: 11 Nov 2015 16:44

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