Constraints of non-oil-related SMEs’ access to bank funding: credit discouragement incidents in oil-based economy

Al Hasni, Rabab Hamad Mubarak (2021) Constraints of non-oil-related SMEs’ access to bank funding: credit discouragement incidents in oil-based economy. PhD thesis, University of Glasgow.

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Oil continues to be the primary engine for Oman’s economic growth and sustainability. The growth of revenue from oil has had a positive impact on economic development and social welfare since its discovery in the 1960s. However, the oil market is vulnerable to global price volatility and from depletion, both of which would have an adverse impact on economy growth. The current sharp reduction of the global market price for oil has forced Oman’s policymakers to seek to increase the contribution of Small and Medium Enterprises (SMEs) to its gross domestic product. Banks are the main source of finance for SMEs in Oman to expand. But because of the risks associated with the opacity of SMEs, banks seem reluctant to lend these firms, with the share of lending comprising only 3% of the total bank loan portfolio.

Previous studies of the financial constraints encountered by SMEs have largely focused on the supply-side, hence little is known about this issue from the demand-side perspective. The aim of this study is to examine the role of demand constraints on access to bank finance. Specifically, the study investigates the influences of firm-level strategy, banking relationships, and the characteristics of the primary owners of firms and firm-level characters on entrepreneurs’ decisions over borrowing - are firms discouraged from borrowing? Using primary data from a research survey, the study estimates the maximum likelihood of firms’ ability to access finance from banks. The findings reveal that compared to applicant firms, discouraged firms that thought their application would be rejected are those that hold a long relationship for more than 6 years with their main bank, Omani-fronted businesses, and those operate in service and trade activities. The empirical analyses confirms that the discouragement determinants are the opposite of those of firms that have been willing to access banks for credit when required. The results also indicated that banks still rely on collateral and the interest rate to alleviate the problem of lack information even if firms show a good performance in their previous sales growth. This could be attributed to imperfect information, unregulated banking relationships and the impact of the oil economy downturn on banking liquidity. For a policy perspective this research suggests that in order to address information asymmetry within non-oil-related SME sector the Central Bank of Oman should include an SME database within the Banking Credit Statistical Bureau (BCSB) to facilitate information exchange in the market as well as enhancing banking relationships.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Colleges/Schools: College of Social Sciences > Adam Smith Business School
Supervisor's Name: Mason, Prof. Colin and Fletcher, Dr. Margaret
Date of Award: 2021
Depositing User: Theses Team
Unique ID: glathesis:2021-82655
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 28 Jan 2022 15:30
Last Modified: 08 Apr 2022 16:55
Thesis DOI: 10.5525/gla.thesis.82655

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