Information Asymmetry and SME Credit Rationing: An Exploration from Theory to Practice

Abstract

When a banking institution is approached for financing, it often finds itself unable to truly assess the quality of the credit applicant. It faces a problem of adverse selection upstream and moral hazard downstream. Even if it sets up an evaluation procedure aimed at reducing information asymmetry, it structurally has less complete information on the true quality of the company, particularly with regard to its level of risk, which can consequently lead to the emergence of the phenomenon of credit rationing.

This scientific article presents a state of the art on credit rationing used by banks against SMEs. Indeed, we looked into the issue of credit rationing for SMEs by seeking on a theoretical and empirical level to identify the key elements that hinder the production of credit for these entities. It emerges from our literature review that the presence of information asymmetry in the credit market and credit rationing can be explained theoretically and empirically as much by micro-economic as macro-economic factors.

Keywords: SMEs, Credit rationing, Information asymmetries, Bank financing.

Classification JEL: G2

Paper Type: Theoretical Research