Collateral and SME financing in Bangladesh: An analysis across bank size and bank ownership types

Abstract

We examine the issue of pledging collateral and its effect on access to credit, interest rates and credit risk of SMEs financing in Bangladesh with respect to bank size. We also examine the collateral classification (fixed assets collateral, personal guarantee and third-party guarantee) by bank ownership types to find what types of collateral are preferred by public, private and foreign banks in Bangladesh for lending to firms. In addition to that, we examine whether collateral requirements are different between large and small banks as they have different incentives for collateral based lending. Our empirical results suggest that small banks have no additional incentives to provide loans based on the collateral security than large banks. Hence, we did not find any evidence that collateral can increase access to credit for SMEs from small banks. Similarly, we also did not find any effect of collateral on interest rates or collateral security can lower the default rates of the SME loans and the results are similar regardless bank size. With regards to collateral segmentation across bank ownership types and bank size, our regression’s results suggest that each type of banks has its own preferences about collateral requirements while lending to firms. Therefore, we conclude that depending on bank internal policy commercial banks ask for different collateral, which comply with the best interests of banks. © Foundation of International Studies, 2016.