FINANCIAL LIBERALIZATION AND COLLATERAL REQUIREMENTS OF SMALL AND MEDIUM ENTERPRISES – EVIDENCE FROM SOUTHEAST ASIAN LOWER AND MIDDLE INCOME COUNTRIES

Abstract

Small and medium enterprise (SME) sector is the main motivation for economic growth in developing countries. However, SMEs encounter different challenges in their activities. One of the biggest obstacles facing SMEs is the constraint on their accessibility to external finance due to the lack of collateral. Financial liberalization, through their impact on credit market structure, may affect SMEs’ dependence on collateral in accessing external finance. The main purpose of this research is to examine the influence of financial liberalization on collateral requirements of SMEs in South-East Asian lower and middle income countries including Vietnam, Indonesia and Philippines. To be specific, the author uses Probit and Tobit regression with Enterprise Surveys Data of World Bank in 2009 and 2015 to evaluate the effect of financial liberalization on the incidence of collateral loans and the level of collateral requirements. In addition to financial liberalization - our main explanatory variable, we control other factors which may affect SMEs’ collateral requirements such as country and firm characteristics. The main result shows that financial liberalization increases the likelihood of collateral requirements.