2.1 ESTRUCTURA DE LA METODOLOGÍA DE LA TESIS

Lending technology refers to the process banks use in the provision of loans to borrowers. Berger and Udell (2006, p. 2946) offer the following definition o f lending technology:

“[...] a unique combination o f primary information source, screening and underwriting policies/procedures, loan contract structure, and monitoring strategies/mechanisms

In the Berger and Udell (2006) paradigm, financial institutions base their underwriting decision primarily on a single lending technology. The paradigm, however, acknowledges that lending technologies are not mutually exclusive. The findings of two Japanese studies (Uchida et al., 2008a, b) seem to contradict this paradigm. Both studies find that Japanese banks use financial statement lending as a basic lending teclinology in conjunction with relationship lending and other technologies. Uchida et al. (2008b) speculate that the differences in financial institution structure between Japan and the United States could explain their finding. However, Berger and Udell (2006, p. 2957) seem to undermine their lending technology paradigm in stating that credit scoring is used in conjunction with all other types of lending technologies, when credit bureau information is available.

The lending infrastructure places constraints on the lending technologies that banks can deploy. The mix o f lending technologies varies across countries. Berger and Udell (2006) provide empirical evidence o f the different patterns of usage o f lending technologies across countries. Banks mainly use asset-based lending in Australia, Canada, the United Kingdom and the United States, according to Berger and Udell (2006). The average volume o f factoring over the period 1994 to 2003 highlights the significant difference in the usage o f factoring across countries. During that period, factoring constituted 0.86% as a ratio o f factoring volume to GDP in the United States, 6.96% in the United Kingdom and only 0.05% in the People’s Republic of China (Klapper, 2006). The use o f credit scoring is mainly limited to developed countries (Berger and Frame, 2007).

In the People’s Republic o f China prior to the passage o f the 2006 EBL and the 2007 Securities Law, banks were essentially unable to deploy lending technologies that relied on securing moveable assets.

Lending technologies fall into two main categories: relationship lending and transaction-based lending. This literature review is limited to the few transaction- based lending technologies that the author deemed to be relevant to SMEs. Transaction-based lending technologies rely on hard quantitative data (Berger and Udell, 2006; Uchida et al., 2008a, b). Berger and Udell (2006) define six distinct transaction-based lending technologies: financial statement lending, small business credit scoring, asset-based lending, factoring, fixed asset lending and leasing. Uchida et al. (2008b) expand the list to seven by splitting the fixed asset category into real estate lending and other fixed asset lending (i.e. equipment lending). Berger and Udell (2006) do not claim that their classification of transaction-based lending technologies is comprehensive.

Berger and Udell (2006) disagree with the widespread view that financial institutions target transaction-based lending technologies towards transparent borrowers while reserving relationship lending for non-transparent borrowers. They argue that with the exception of financial statement lending, all transaction-based lending technologies are suitable for non-transparent borrowers.

There is consensus that relationship lending is suitable for addressing the opacity problem o f SMEs (Carbo-Valverde et al., 2009; Berger and Udell, 2006; Ogura, 2007). This form o f lending has disadvantages as it takes time for banks to build up relationships with firms (Berger and Frame, 2007). Furthermore, there is growing evidence that banking competition discourages relationship lending (Ogura, 2007; Petersen and Rajan, 1995).

Asset-based lending, credit scoring and factoring seem to be more effective relative to the other transaction-based lending technologies at expanding bank credit availability for SMEs. The academic literature indicates that credit scoring has not yet taken hold outside developed countries (Berger and Frame, 2007). Therefore, the author has limited the focus of the review to asset-based lending and factoring for the purpose of

this research project. These two transaction-based lending technologies address the transparency problem o f SMEs by securing lending against moveable assets.

2.2.1 Asset-based Lending

Asset-based lending works around the issues of the transparency and disclosure o f SMEs by lending against accounts receivables and inventory. These pledged assets are the primary source o f repayment for the loan (Berger and Udell, 2006). Berger and Udell (2006) argue that while asset-based lending may overlap with other lending technologies with respect to the “underlying assets” on which the loans are secured, it differs in that the “creditworthiness o f the borrower” is not the key consideration.

“The use o f collateral itself however, does not distinguish asset-based lending from the other lending technologies. The pledging o f accounts receivable and inventory is often associated with financial statement lending, relationship lending, and credit scoring, where collateral is used a secondary source o f repayment. Under asset-based lending, in contrast, the extension o f credit is primarily based on the value o f the collateral, rather than the overall creditworthiness o f the fir m ”. (Berger and Udell, 2006, p. 2949)

In essence, it precludes the need to ascertain the creditworthiness of the firm by basing the underwriting decision on a specific class o f assets o f the SME (OECD, 2007; Berger and Udell, 2006).

According to Berger and Udell (1998, p. 641), monitoring accounts receivables and inventory can provide banks with valuable information about the future prospects o f the firm, potentially leading to more favourable credit terms.

Berger and Udell (2006) argue that asset-based lending is dependent on the level o f the development o f the lending infrastructure. Specifically, they consider an efficient collateral registration system and an effective bankruptcy law to be prerequisites for banks to be able to employ asset-based lending.

2.2.2 Factoring

This lending technology works around the opacity problem by basing the underwriting decision on the accounts receivables o f the firm. The lending institution is not concerned about the creditworthiness of the borrower but rather the risk associated with the accounts receivables. The risk associated with the accounts receivables is the aggregate creditworthiness o f the borrower’s customers that are linked to accounts receivables (Klapper, 2006). Factoring thereby allows suppliers with poor credit ratings to avail themselves o f the creditworthiness o f their high- quality buyers, according to Klapper (2006).

The lending institution purchases the accounts receivables from the borrower at a discount (Berger and Udell, 2006; Klapper, 2006). The purchase o f the accounts receivables effectively separates them from the bankruptcy estate o f the borrower. This separation underlies the premise that factoring is independent of the legal environment and the attendant expectation that it should flourish in countries with weak legal environments. Indeed, Klapper (2006, p. 2) finds “weak evidence that factoring” is “larger in countries with weak enforcement”.

The lending institution gives the borrower an advance payment, and the remaining balance is paid to the borrower (less interest and service fees) once the receivables are settled.

Factoring is, however, dependent on the lending infrastructure in one respect. Lending institutions rely on credit bureaus to assess the creditworthiness o f the borrower’s customers, whose accounts receivables it will purchase. Klapper (2006) finds a strong positive correlation between factoring and the availability o f credit information in a cross-country study.

The lending technologies reviewed use different methods to circumvent the opacity problem o f SMEs. These lending technologies rely on underwriting loans against moveable assets, which fit the asset profile o f SMEs.

Hypothesis 1: There is a negative relationship between a bank’s focus on moveable assets and the SME owner and/or manager’s perception of financial obstacles.

According to IFC (2007), SMEs have the bulk o f their assets in the form o f accounts receivables and inventory. There is evidence that lending against moveable assets increases credit availability for these SMEs (IFC, 2007; Maréchal et al., 2009; Klapper, 2006). The author hypothesizes that a focus by banks on lending against moveable assets during the underwriting process reduces the SME owner and/or manager’s perception o f financial obstacles.