Owner-manager experience and loan default propensity of SMMEs

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Peer-Reviewed Research
  • SDG 17
  • SDG 12
  • SDG 8
  • Abstract:

    The paper investigates the option of determining the loan default propensity of an SMME by relying on non-financial indicators associated with owner-manager experience. This is essentially because the potential of SMMEs to contribute to economic development has been reduced by a cocktail of problems of which inaccessibility to finance in the form of institutional loans is protuberant. This problem is linked to the lenders’ loan default propensity estimation, often based on financial indicators which small businesses are not quite adept at using to signal their performance ability. The study, an applied research effort, is executed from a positivist standpoint. Using a deductive reasoning approach, hypotheses were formulated from a review of extant literature. A survey research strategy was then adopted and data was collected in a cross-sectional manner from a randomly selected sample of owner-managers, so as to empirically ascertain the (non)existence of a relationship between each of three dimensions of owner-manager experience and business loan default propensity. Results revealed that for all categories of small businesses, regardless of size, industry experience rather than managerial experience of the owner-manager had a significant association with business loan default propensity. On the other hand, interestingly, the association of loan experience of the owner-manager and business loan default propensity was business size-dependent. This, points to size-dependent idiosyncrasies, a reality often overlooked when the small business population is treated as a homogenous set in the loan default estimation process and this should prove invaluable for institutional lenders and SMMEs, alike.