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Financing difficulties for SMEs and credit rationing – an expanded model of mortgage loans with asymmetric information

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  • Benjiang Ma
  • Zhongmin Zhou
  • Xiaohong Chen

Abstract

This article presents a new model of mortgage loans under reasonable assumptions. A several key variables that affects the success of a project, such as project risk, total investment, lending rate,mortgage, and self-financing are jointly considered in the model. The model takes the participation constraints and the incentive compatibility constraints into account for enterprises and banks on project investment actions respectively. Our model can explain the coexistence scenario of small medium enterprises’ (SMEs) financing difficulties and credit rationing in credit markets with asymmetric information. It reveals that higher enterprise self-financing for the project is a “credible factor” to the bank. Banks put forward strict requirements on mortgage for the SMEs with low proportion of project self-financing, which will lead to two scenarios:one is that some SMEs would not get loans due to insufficient mortgage assets; other is that some SMEs will voluntarily give up loans because of loan requirements, even if they have enough mortgage assets. Rationing is implemented both to large enterprises and SMEs, but the degree of rationing is gradually strengthened with the reduction of self-financing scale for the project.

Suggested Citation

  • Benjiang Ma & Zhongmin Zhou & Xiaohong Chen, 2019. "Financing difficulties for SMEs and credit rationing – an expanded model of mortgage loans with asymmetric information," Applied Economics, Taylor & Francis Journals, vol. 51(48), pages 5243-5257, October.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:48:p:5243-5257
    DOI: 10.1080/00036846.2019.1610721
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    Cited by:

    1. Mohamed Oudgou & Abdeslam Boudhar, 2023. "The bank–SME relationship and rationing risk reduction: an empirical study on survey data," SN Business & Economics, Springer, vol. 3(8), pages 1-39, August.
    2. Rozina Akther, 2022. "Factors associated with small and medium enterprise financing: a study from Bangladesh," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 12(1), pages 265-277, December.

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