The availability of credit from the formal financial sector to small and medium enterprises in South Africa

Abstract

Orientation: Small and medium enterprises (SMEs) in most developing economies depend heavily on credit from the formal financial sector since financial capital from other sources is insufficient for their growth and survival.

Research purpose: Despite SMEs contributing substantially towards sustainable economic development, they have the highest failure rate in South Africa. Thus, the aim of this research is to explore the availability of credit from the formal financial sector to SMEs from a supply side perspective.

Motivation for the study: Research on improving SMEs access to financial capital from the formal financial sector will assist in reducing the failure rate of SMEs and boost economic development in South Africa.

Research approach/design and method: Using an interpretivistic research paradigm, data was collected from credit and business managers from eight of the largest formal financial sector using semi-structured in-depth interviews and analysed using content analysis.

Main findings: The findings revealed that collateral, annual business turnover and audited financial records are the most important factors influencing the formal financial sector to provide credit to SMEs. The lack of investment capital, collateral and financial records are the main challenges faced by the formal financial sector in approving credit to SMEs.

Practical/managerial implications: Implications for government and the private sector in policy development were provided.

Contribution/value-add: This research highlights the most important factors and challenges faced by SMES in accessing credit from the formal financial sector. Using a qualitative research design further contributed, from a methodological perspective, to the literature on the financing of SMEs.