Sources of Capital to Small And Medium Size Enterprise in developing countries

1918 Words Jul 17th, 2018 8 Pages
During the last two decades Small and medium size enterprises have played an increasingly important role for economies worldwide and continues to be an important tool for economies especially for the growth of developing countries. The main challenge faced is the level of credit risk. The goal for a bank is to maximize the risk - adjusted rate of return; hence managing credit risk is essential for long term profitability and lending. Loans (credits) are the most common credit risk that banks need to manage (Basel Committee on Banking Supervision, 2000). In this paper, credit risk will refer to the risk banks become exposed to when they lend money to companies, in our case small and medium size firms
1.3. Sources of financing
The survival
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However, recent research has focused on finding the best determinants of capital for firms (Titman and Wessel 1988; Frank and Goyal 2004)
The following have been advanced as attributes that different theories of capital structure suggest may affect the firm's debt-equity choice; tangibility, non-debt tax shield, growth, profitability, uniqueness of firm, industry, size, and volatility of revenue. Titman and Wessels (1988) The following attributes however determine capital structure of firms.
i. Tangibility
Firms may prefer debt to equity financing to take advantage of its existing tangible assets. Deesomsak (2004) has defined tangibility as the ratio of total fixed assets to total assets. The relationship between fixed assets and interest bearing debt ratios has been referred to by Frank and Goyal (2003) as the most common findings in capital structure studies. This factor is largely motivated by the Agency cost, asymmetric information and bankruptcy cost. The Agency theory is of the view that firms with high leverage tend to invest sub optimally transferring wealth to equity holders. These cause lenders to require collateral because the use of secured debts can help alleviate the problem. Moreover, the liquidation value of the firm increases with the tangibility of assets and decreases the probability of mispricing in the event of the firm going bankrupt. Firms unable to provide collaterals with known values will have to pay higher rates of interest, or will
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