UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ---------------------------- PHAN THI TRAN NGA THE IMPACT OF BORROWERS’ ATTRIBUTES ON THE POSSIBILITY OF SMEs LOAN APPROVAL IN HCMC, VN MASTER’S THESIS SUPERVISOR: Dr. CAO HAO THI Ho Chi Minh City, 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com i ACKNOWLEDGEMENTS Firstly, I would like to express my gratitude to Dr. Cao Hao Thi, my supervisor who has given a zealous support and advices during doing research period. Especially, I am grateful for his enthusiasm in answering, reminding as well as his feedback, guidance and correction for me able to accomplish this thesis.
Secondly, I would like to thank Dr. Dinh Thai Hoang who taught data analysis, helped me analysis methodology and data process of this thesis as well. Thirdly, I would also like to thank all of my lecturers at International School of Business (ISB) – University of Economics Ho Chi Minh City (UEH) – for exchanging & sharing their knowledge and experience during my master course. Enthusiastic assistance provided by the ISB’s executive board and staffs was also greatly appreciated.
Next, I would like to say thank you for creditors, who helped me to conduct survey, gave suggestions and shared their experience in profession to do this research better. Last, I would also want to thank my friends and classmates who share their knowledge support, and work with me during time I do this study. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ii ABSTRACT Small and medium sized Enterprises (SMEs) play an important role in transitional economies and have high relevance for their economic policy of many countries. In Vietnam, SMEs account for 77 percent and 87 percent by regular workforce and registered capital criteria in 2011 (Cuong, Sang & Anh, 2008) and produce over 40% of GDP.
Yet, the SMEs have some difficulties in lacking of finance supply from financial institutes or banks. So this research will identify the factors effecting to the loan decision-making. From those factors, researcher will find down the key one that impacts strongest on the possibility of loan approval. Before a bank decides to invest into companies in a form of loan, they will put into consideration a lot of aspects.
In this decision making process, bank officers will take into account a lot of different kind of borrower’s attributes related to background and experience, the business and conditions surrounding it. This research is done by thorough literature review on concepts relating to six borrower’s attributes. The analyzing result found there are only three among six borrower’s attributes which have positively related to possibility of SMEs loan approval. The research model explained 47.3% the variance of the borrower’s attributes on the possibility of SMEs loan approval.
Key words: SMEs, loan approval, relationships with the bank, value of collateral, firm size, related business experience, share of investment, business plan LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iii TABLE CONTENT ACKNOWLEDGEMENTS. v LIST OF TABLES. vi LIST OF FIGURES. vii CHAPTER 1 INTRODUCTION.
6 CHAPTER 2 LITERATURE REVIEW. Relationship with the bank. Value of collateral. Related business experience.
Share of investment. Lender’s human capital. Hypotheses of this study. 20 CHAPTER 3 RESEARCH METHODOLOGY.
22 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Methods of data collection. Methods of data analysis. Testing the reliability.
Exploratory Factor Analysis (EFA). Multiple regression analyses. 29 CHAPTER 4 DATA ANALYSIS. Result of Pilot survey.
Testing the reliability of Relationship with bank and business plan. Exploratory factor analysis (EFA). Result of official survey. Descriptive statistics analysis.
Refinement of measurement scale. Managerial implications and recommendation. Suggestions for further research. XI APPENDIX A INTERVIEW QUESTIONS.
XVII APPENDIX B QUESTIONNAIRE. XIX APPENDIX C DISCUSSION FOR EXPLAINATION. XXVIII APPENDIX D REGRESSION RESULT. XXIX LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com v ABBREVIATION SMEs: Small and medium enterprises SPSS: Statistical Package Software for Social Science EFA: Exploratory factor analysis LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vi LIST OF TABLES Table 3.1a Measurement scale for independent and dependent factors .1b Measurement scale for control variables.1 Reliability of Relationship with the bank (REL) .2 Reliability of Business Plan (PLA) .3 KMO and Bartlett's Test .4 Total Variance Explained .5 Rotated Component Matrixa .7 Reliability of relationship with the bank (REL) .8 Reliability of business plan (PLA).9 KMO and Barlett’s Test .10 Total Variance Explained .11 Rotated Component Matrixa .12 Matrix Correlations between variables in equation regression .14 Regression analysis result.
47 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii LIST OF FIGURES Figure 1.1 SMEs’ contribution for economy by country .1 The Research model.1 The revised research model. 48 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 CHAPTER 1 INTRODUCTION 1. Research background Small and medium sized Enterprises (SMEs) play an important role in transitional economies and have high relevance for their economic policy of many countries. Thus, governments throughout the world focus on the development of the SME sector to promote economic growth (Olawale & Garwe, 2010).
In Vietnam, according to a Spring 2011 report the number of SMEs is nearing 400,000. SMEs represent 99 percent of the number of businesses of the country and occupy an overwhelming proportion in total number of country’s enterprises accounting for 77 percent and 87 percent by regular workforce and registered capital criteria in 2011 (Cuong, Sang & Anh, 2008). According to the government over 40% of GDP is produced by SMEs. From that, SMEs have vital and undeniable roles in promoting economic and social development in Vietnam.
They have made a significant contribution to the country’s advancement and enhancing the efficiency and the flexibility of the economy (Cuong, 2007). Apart from being a relatively dynamic sector in the economy, SMEs have role in creating jobs, maintaining high mobility of the labor market, and narrowing development gaps among localities of the country (Cuong, Sang & Anh, 2008). Despite the positive contribution for economy, SMEs still face the difficulty in accessing loan. So the financing for small and medium enterprises (SMEs) recently years has been a subject of great interest both to policymakers and researchers (Beck, Demirgüç-Kunt, & Pería, 2009).
Because financing loan is necessary for LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2 enterprises in the economic crisis period. Especially for SMEs, accessing finance becomes more important because that helps them have capital to continue operating and developing. However, with limited supply fund from financial institutions, but increasing financial demand of enterprises, how SMEs do to access loan that depends on many factors, including the borrower’s attributes and banks’ side ones. And how the borrower’s attributes affect to the possibility of SMEs loan decision-making which is the issue needs to research in this paper.1 illustrates a more in-depth look of the breakdown the small business impact on the economy by country.1 SMEs’ contribution for economy by country Source: SMEs in Asian Report 2011–12; McKinsey Global Institute analysis LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Research Problem The capacity for SMEs will develop their potential in an economy depends on the availability of finance. Finance in general and credit in particular is especially important for all of businesses as well as SMEs, since they are unable to finance themselves through retained earnings or equity financing. Most SMEs rely on informal sector financing to meet their needs. The main source of formal financing is bank lending.
Despite the fact that financing is a major factor for growth of SMEs and the state-owned Commercial Banks (SOCBs) are beginning to extend more credit to the SMEs, most SMEs still face problems when accessing to bank finance. And SMEs generally tend to be confronted with higher interest rates, as well as credit rationing (OECD, 1998). In Vietnam, according to World Bank’s assessment, one of the biggest weaknesses in business environment is the problem of access finance (TTVN, 2012). Besides, as announced by the Vietnam Chamber of Commerce and Industry (VCCI) on 14 March, 2012, Vietnamese SMEs have difficulties in accessing loans rather than big enterprises (LD, 2012).
Because of unable accessing finance, many Vietnamese SMEs stop operating temporarily and go bankruptcy as lack of fund (Chi, 2012). There are many factors to be considered by a bank before a loan approval is made. These negative impacts are why, before any decisions are made on loan LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4 applications, the credit officers perform extensive analyses to screen out potential bad loans. In this decision-making process, the bank officers need to consider different attributes related to the borrower's background and experience, the business and the conditions surrounding it (Bruns, Holland, Shepherd, & Wiklund, 2008).
And these attributes may affect the likelihood of loan approval by credit institutions in general and in banks in particular. As mentioned above, finance is an essential element for business maintains and develops them. Yet, not all enterprises can have enough effort to do with their internal capital, they often base on external capital that is loan from banks in usual. However, with the limited fund and in order to avoid the repay risk, banks as well as creditors have to put into consideration carefully to choose the best firms to grant loan.
Therefore, there will be many SMEs cannot achieve credit that is the problem need to do in this study. Furthermore, in Vietnam, there are not many studies which gave explanations on the relationship between borrower’s attributes, lender’s human capital and possibility of loan approval. This research is practical significance for accessing loan and exploring the impact of the borrower’s attributes on the possibility of loan approval; and how lender’s human capital effect to likelihood of loan approval; and just focuses on loans to SMEs because they occupy majority among the number of businesses in Vietnam. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Research objectives The objectives of this research are to: - Identify borrower’s attributes effect to the possibility of loan approval from financial institutions as well as banks in Vietnam. - Find down the key and decisive attribute affects to the possibility of loan approval. - Recommend for SMEs in Vietnam when applying loan application in order to receive loan grant. Research scope The survey will be conducted on commercial Banks including foreign, owned-state and corporate banks in HCMC, Vietnam.
The respondents will be these banks’ creditors who are responsible for collecting and evaluating information regarding to prospective borrower as well as plays the decisive role in loan approval. Research contribution The research result will help SMEs in Vietnam focus on three attributes that strongly impact loan decision are relationship with the bank, related business experience, and business plan in order to receive the loan grant highly when applying a loan application. Especially, new enterprises with less related business experience should consider the factor of relationship with the bank and well- prepare the business plan so that they can achieve loan approval. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Research structure This research includes five chapters from chapter 1 to chapter 5. The first chapter or introduction generally introduces the research background, research problems, research objectives, research scope, and research contribution. Chapter 2 is called literature review. In this part, it presents concepts and theories relating to loan approval (5Cs principal), borrower’s attributes and lender’s human capital affect to loan decision-making in previous studies.
Based on theories, initial research model and hypotheses used for the research are formed. Next, Chapter 3 is research methodology that will show the research process and data collection. There are 3 elements in Data collection consisting of data sample, data size and method using in this research. Then, Chapter 4, data analysis will reports the analysis results of data collected from the survey.