Credit Rationing in Small and Micro Enterprises: A Theoretical Analysis

Abstract

One of the features of credit markets is that borrowers are sometimes rationed in the amount that they can borrow, which differentiates them from other markets. Small and micro enterprises (SMEs) are more likely to be eliminated than large and medium-sized enterprises under credit rationing. However, SMEs play a significant role in employment creation and growth of gross domestic products in developing countries. So, it is of great significance to study the reasons why SMEs are more vulnerable to credit constraints. By considering the differences in characteristics between SMEs and large and medium-sized enterprises, we established a theoretical model with endogenous enterprise size, and by considering banks’ screening principles before and after the loan approval, we have analyzed the micro-mechanism in which there are significant differences in credit availability between SMEs and large and medium-sized enterprises. Our conclusion indicates that credit rationing in SMEs is the result of the rational choice by banks for the purpose of profit maximization.