Relationship lending and the finance gap faced by SMEs in Malta : an assessment

Abstract

Purpose: This study examines the principles of Relationship Lending as a lending technique to be better applied in granting finance from Banks to SMEs, at sustainable credit terms and ease of borrower information. From the preliminary research conducted earlier, issues were identified in relation to the cost of finance from SMEs which are still relatively high. Main causes for this are the increased regulatory pressures and information asymmetry. Research: The main objective of this study is to understand the Finance Gap faced by SMEs when requesting finance from Banks, and understand the potentials of Relationship Lending in addressing this gap. Most of the study emanates on secondary research, including a substantial amount of literature review on a number of articles, speaking about important topics, namely Relationship Lending and Finance Gap. A qualitative approach was chosen to search primary data, by conducting a number of in-depth interviews with a number of Trade Associations and representatives from local banks. The scope of using primary research should help in confirming the hypothesis that Relationship Banking can indeed be a contributing factor in integrating the finance relationship between Banks and SMEs. Conclusion: This concluded that local banks have a clear understanding of what Relationship Lending is, and how it is used within a bank, as well as the benefits of collecting information and the relationships banks create with SMEs. However, Banks need to make efficient use of Relationship Lending, to render such technique more sustainable and strategic for them, as well as for their SME borrowers. The study provides detailed analysis of the advantages and drawbacks of Relationship Lending as well as some potential improvements for such a lending technique to be more beneficial and sustainable.