The heuristics that influence bank lending decision-making during the SME default risk evaluation process

Abstract

Access to finance for SMEs is a persistent wicked challenge that is faced globally. Formal lending, from financial institutions such as commercial banks, is the dominant source of financial resources for SMEs. Therefore, the supply-side perspective on this challenge is pertinent to understanding the constraints that result in the low access to finance that SMEs face. Financial factors such as financial information and the 5Cs of credit form the basis of the credit risk evaluation process to inform the final credit decision. The tools used to predict the default risk for SMEs do not accurately account for the nuanced nature of SMEs. Therefore, a multi-criteria decision-making model that includes non-financial factors is better suited for SMEs. These non-financial factors include the behavioral factors of the credit decision-maker and the SME owner. Therefore, the purpose of this research is to understand the heuristics that influence bank lending decision-making during the SME default risk evaluation process. A qualitative exploratory approach was taken to gain new insights. A narrative research design was adopted, and 10 in-depth, semi-structured interviews were conducted with credit decision-makers from 3 commercial banks. The data proves that heuristics do influence credit decision-making during the SME default risk evaluation process.