Efficiency, Capability, and Context:An SEM-Based Analysis of SME Financing in Bangladesh

Abstract

Purpose: There has always been a difficulty for Small and Medium Enterprises (SMEs) in financing due to institutional deficiencies, limited managerial expertise, and immature financial market in the country. This study attempts to explore the effect of firm-level, managerial, and environmental factors on leverage decision of SMEs using total and long-term debt as proxies for leverage decision.

Design/methodology/approach: A sample of 224 SMEs registered at Bangladesh Small and Cottage Industries Corporation (BSCIC) was selected and their response collected through structured questionnaire form. Structural equation modeling technique was used to explore the simultaneous impact of operating, managerial, and institutional factors on SMEs leverage decisions.

Findings: The findings reveal that operational efficiency and competitiveness have positive impacts on total debt and long-term debt. Profitability and managerial capability have a negative impact on leverage, which supports the pecking order hypothesis that suggests profitable companies are more dependent on internal resources. Conventional factors like firm size, firm age, and asset tangibility do not hold any statistical significance, indicating that institutional forces dilute the explanatory powers of traditional determinants in the emerging market environment. Financing availability has a positive association with long-term debt, but institutional influences show a surprising negative association with leverage.

Originality/value: While previous research concentrated on conventional firm-level factors by means of regression analysis, this study emphasizes the importance of operational efficiency, managerial capability, and institutional influences on financing practices under weak financial institutions.

Practical implications: The results indicate that there should be performance-based loaning schemes, improved financial literacy programs for SMEs, and reforms to help SMEs access formal financing.

Research limitations: The study is constrained by the use of cross-sectional analysis and non-probabilistic sampling technique. Subsequent research could adopt longitudinal analysis and sector-wise analysis of financing behavior of SMEs.