Essay About Financial Institutions And Importance Of Lending Relationship

Small and Medium Enterprises: The Importance of Lending Relationship
Small and Medium Enterprises: The Importance of Lending Relationship[a]SMEs (small and medium enterprises) are important for our economic because of they are the engine of economic development, but many obstacles from market and financial institutions make them hard to grow (Beck & Kunt-Demirguc, 2006). The financial institutions argue that was because of SMEs’ opaqueness and have less assets that would be used as collateral.  Because of these limitations, SMEs have some barriers to access the credit facility from the banks and they have to depend on their internal financing to develop their business (Rahaman, 2011). Demirguc-Kunt and Beck (2006) found that compare with large companies, SMEs have more obstacles that limit them to grow optimally, and financial barrier is one of these (p. 2941). It means that in order to grow optimally, SMEs should to overcome their obstacles, especially in finance issue. Further, de la Torre (2006, p. 2292) stated that even SMEs already have relationship with banks and purchased some banking products, they still unable to obtain credit facility from the banks.Previous research stated that SMEs are more likely to have financial constraints because of their opaqueness, their little tangible assets as collateral, and the riskiness of their business strategies[b] (Brancati, 2015, p. 449). In other words, they have strong asymmetric information issues that could not fit with the bank’s bureaucracy in loan procedure (Comeig et al, 2015)[c].  In my view, the asymmetric information was as a result of lack of openness from SMEs about their business activities and unfortunately banks need this information to process credit proposals. To obtain this kind of information, bank does personal and society approach to cover its needs of data in credit process. It is not easy for banks to do this strategy because it needs officers that have ability in making long term and continuous relationship with SMEs.From numerous studies about the SMEs issues in financial constraint, there is no study that summarizes and synthesizes [d] about the limitations of small business and why lending relationship in crucial for SMEs in order to gain credit facility from the bank. [e]In this paper, I want to contribute by providing a synthesize of issues and findings from previous studies about the importance of lending relationship for small and medium enterprises in accordance to access credit facility from the banks[f]. Thus, I hope this research can give some valuable information for the financial institutions about SMEs problems in financial constraint and using the lending relationship to approach them closer. Presbitero and Zazzaro (2011) said that relationship lending is perceived as an important part for small business companies to help their finance problems (p. 387). For SMEs, they need help from the banks to build a long lasting lending relationship.[g]