Financing for small and medium enterprises: Do all banks apply the same lending technologies?

Small and Medium Enterprises (SMEs) face various problems inhibiting their growth potential, one of which is their financing. This study explores the issue of SME financing in Malaysia by interviewing SME loan officers/ SME specialists from two different types of banks—a commercial bank and a Development Financial Institution (DFI). The interviews reveal that the inability of SMEs to provide hard information in the form of proper documentation and book keeping is the main reason for the financing problems faced by these SMEs. In particular, commercial banks prioritize the ability of the clients to pay their debt and their past debt track records over other factors when deciding on granting the loans. DFIs are also concerned about the repayment ability but they also focus on soft information such as business acumen, entrepreneurship skills and character of the loan applicant, i.e., hard information is important but not their only priority. This qualitative study thus provides an initial exploration into the different requirements of different banks when evaluating SME financing applications and thus, highlights the need to take into consideration these differences when studying issues related to loan decisions by banks.