Bounded rationality in bank credit decisions for SME lending: Evidence from bankers in Malaysia

A behavioural finance perspective offers possible ways for bankers to enhance small and medium-sized enterprises’ (SMEs) access to financing and the quality of a bank's credit portfolio but is neglected in the present bank policy and practice. This paper studies the fundamental and behavioural factors that determine credit decisions for SMEs by bank officers in Malaysia using the theoretical lenses of bounded rationality. In finding ways to reduce behavioural biases, the effect of the human capital factor on credit decisions is examined. The data for the study were obtained from 161 bank credit officers in development financial institutions and commercial banks by using stratified random sampling that sufficiently represents the local banks' population in Malaysia. Hierarchical multiple regressions were used to examine the relationship between the fundamental factors, behavioural factors and human capital factors on bank officers' credit decisions on lending to SMEs. In the assessment of the fundamental factors, regression results showed that character and condition have a positive relationship with the credit decision making. In the behavioural factors assessment, intuition, optimism and overconfidence are influential in behavioural credit decision making, while the interaction analysis shows that credit experience and emotional intelligence can reduce the influence of behavioural factors on bank officer credit decisions for lending to SMEs. Generally, the findings of this study confirm the theoretical framework of the bounded rational credit decision and would be valuable in enhancing the theory, practice and policy regarding lending to SMEs, particularly in minimising behavioural biases in lending decision making. This research offers bounded rational perspectives on bank credit officers' decisions. The research framework revealed that bank credit officers are influenced by both rational (fundamental factors) and irrational (behavioural factors) in their credit assessment and decision-making process. Presumably, the influence of behavioural biases could have negative effects on SME financing access and credit portfolio quality. In addition, the framework provides insights into ways to reduce behavioural biases to improve rationality in credit decision making and credit portfolio quality.