Bank credit risk assessment and adverse loan selection for small enterprises: A study of commercial banks in Pakistan

Khawaja, Arsalan Tauqir (2021) Bank credit risk assessment and adverse loan selection for small enterprises: A study of commercial banks in Pakistan. Doctoral thesis, Birmingham City University.

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Arsalan Tauqir Khawaja PhD Thesis published_Final version_Submitted Aug 2020_Final Award Mar 2021.pdf - Accepted Version

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Abstract

To promote bank lending to small enterprises and reduce the adverse selection error, Governments of various countries have launched the Credit Guarantee Schemes (CGS). The central argument of this thesis is that despite the presence of credit guarantee scheme in Pakistan; bank loan rejection rate is very high, and the problem of adverse selection still exists for small enterprises. A review of the literature suggest that no study has been conducted in Pakistan to investigate bank lending criteria on loan applications from small enterprises and the effectiveness of the CGS in reducing the debt finance gap for small enterprises. Hence this study made a theoretical and methodological contribution to the study of bank credit risk assessment and adverse selection on loan applications from small enterprises, by using a case study to examine the bank credit risk assessment criteria and the effectiveness of the CGS for small enterprises in Pakistan. This study used 266 questionnaire responses and 50 semi structured interviews from credit officers working at commercial banks in Pakistan (supply side), and 25 semi structured interviews of small enterprise owners in Pakistan (demand side)to answer the following 4 research questions: (1) importance of small enterprise owner characteristics, firm characteristics and firm financial indicators in credit officers lending decision making on loan applications from small enterprises (2) relationship between family social capital benefits and success to bank finance for small enterprises (3) relationship between compliance requirement and credit officers decision to make a referral under the CGS (4) circumstances in which adverse selection takes place. Though the supply side results found a significant relationship between firm characteristics and financial indicators in credit officers lending decision on loan applications from small enterprises in Pakistan; however, no relationship was found between small enterprise owner characteristics and credit officers lending decision. Moreover, the demand side results suggested that networks and personal connections are very important for small enterprises to access bank finance in Pakistan. Similarly, the supply side results found no relationship between family social capital benefits with access to bank finance for small enterprises however the demand side results suggested that family social capital plays an important role in the credit risk officers lending decision. Results from this study also suggest that due to compliance requirements credit officers are reluctant to make a referral under the SBP CGS. Moreover the results from this study also found that Type 2 error of adverse selection takes place due to credit officers training, credit officers preference in lending to certain businesses sectors, and the influence of family networks and personnel connections.

Item Type: Thesis (Doctoral)
Dates:
DateEvent
21 August 2020Submitted
26 March 2021Accepted
Uncontrolled Keywords: Credit risk assessment, Access to Finance for SMEs, Adverse Selection, SME Bank Finance
Subjects: CAH17 - business and management > CAH17-01 - business and management > CAH17-01-01 - business and management (non-specific)
CAH17 - business and management > CAH17-01 - business and management > CAH17-01-07 - finance
Divisions: Doctoral Research College > Doctoral Theses Collection
Faculty of Business, Law and Social Sciences > Birmingham City Business School > Centre for Enterprise, Innovation and Growth
Depositing User: Jaycie Carter
Date Deposited: 23 Jun 2022 10:59
Last Modified: 23 Jun 2022 10:59
URI: http://www.open-access.bcu.ac.uk/id/eprint/13346

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