Dissertation
The potential of Small and Medium Scale Enterprises (SMEs) in promoting economic
growth is widely accepted and documented by scholars and policy makers alike. Limited
access to credit for these small and medium scale enterprises (SMEs) has been identified
as a major bottleneck in realizing this potential. Building on the concept of information
asymmetry and transaction costs theories, this study tested the influence of firm and
entrepreneur characteristics on bank's credit rationing and the impact of credit rationing
on SMEs growth in the Tanzanian setting. A cross sectional survey design was used to
collect data from 271 entrepreneurs and 28 credit officers. Descriptive statistics. Analysis
of Variances (ANOVA) and binary logistic regression analysis were employed to Analyse
the study data. The findings reveal that credit rationing of SMEs is explained by firm
characteristics, the findings indicate that young borrowers and entrepreneurs who have
had insufficient knowledge about bank requirements, who lack knowledge of preparing
business plans, who lack credit history and who arc constrained by the cost of preparing
business project plan, were more likely to be rationed. On the other hand, entrepreneurs
who have had better past relationship with the banks were less likely to be credit rationed.
furthermore, the findings indicate that specific business characteristics, such as firm age,
size, industry, geographical distance, poor quality accounting practices and collateral
have some influence on credit rationing. The study also reveals that low turnover of bank
account, high monitoring costs of SMEs loan and asymmetric valuation of the projects
increase bank's credit rationing. The findings reveal further credit rationing affect sales
and employment growth. The study recommends that banks should develop training
programmes for borrowers about all aspects of the lending transaction and acquire
information processing capabilities and lending techniques that overcome asymmetric
information. It is also recommended that government should formulate rules on financial reporting and disclosure. Government should also provide training programs in business
plans, income tax assessment and financial management for SMEs owners. It is further
recommended that SMEs should show consistent cash flow, in line with the performance
of their bank accounts. SMEs also need to keep proper financial statements and develop a
culture of transparency and accountability.
Mzumbe University