The Need for Agile Relationship Lending between Small Business and Banks, towards a More Engaged Relationship: A Case Study in Khayelitsha, South Africa

Abstract

Despite much attention being focused on financing small, medium and micro enterprises (SMMEs), they (SMMEs) continue to face survival and growth challenges. Banks tend to be reluctant to offer loans and financial assistance if, based on their assessment of financial statements, the small businesses do not have the ability to repay loans, caused by the level of “opaqueness” of information that the banks have about small businesses, which has resulted in the introduction of the concept of ‘relationship lending.’ If banks are more agile and have an engaging relationship with small businesses, they will be in a better position to use their discretion when granting finance. Through engaged relationships with small business, banks would better manage information asymmetry and offer some possible specialised support to SMEs. By using a semi-structured questionnaire, the study probed problems with information asymmetry between the bank and small businesses, towards more agile solutions and engaged relationships. A case-study based research was conducted in two established businesses in the informal township of Khayelitsha in the Western Cape of South Africa. It became apparent that transactional lending is not viable in a country where a large population lives in poverty. It is recommended that banks in developing countries such as South Africa be more agile in order to speed up access to finance by small businesses.