Exploring the role of loan default ratio in the SME sector of Pakistan

Absztrakt

The study examines the impact of the lending decision made by Development Finance Institutions (DFIs) on the growth of SMEs, while analysing the low growth rate in the SME sector of Pakistan and the high default rate in finance facilities from the DFIs. The research employs the archival method of reviewing related literature (theoretical, applied and empirical literature). Data was gathered from the designed sample by using a questionnaire distributed among the selected population. The relationship between the default rate in the SME sector of Pakistan and the lending decision process will be analysed, along with other factors which cause the borrower’s inability to repay the debt and the markup on the financed amount. The major contributions and findings of this research include the basic reason for SME default based on problems in the lending decision process, the tools used for analysing the capacity of the borrower, and a critical review of deficiencies in the SME lending decision process. This research focuses on the SME lending decision factors due to which the prospective borrowers may be unable to get finance, while on the other hand borrowers with weak creditworthiness may be selected and finance may be disbursed, causing the default. The main contribution of this research is bringing together most of the available literature, focusing on the major causes of loan default in the SME sector of Pakistan and properly analysing potential customers for disbursement of finance.