Abstract:
Spurred in by the phenomena of opacity and riskiness of financing small and medium-sized enterprises (SMEs) worldwide, numerous investigations have been conducted to provide explanations to financial service providers’ risk perceptions, lending practices and procedures. The risk compensation theory and the principal-agent theory provide a theoretical framework of most of the studies in risk perception. Using the positivist and the interpretivist paradigm as well as the cross-sectional design, the study specifically explored the types of risk and risk perception in formal and informal financial institutions, examined the determinants of risk, and ascertained the SMEs characteristics and credit risk. Questionnaires and interview schedules were used to collect data from 64 randomly selected credit officials and 217 SME operators and managers. In-depth interviews were conducted with some bank managers. The data were analysed by using descriptive statistics like mean, standard deviation, frequencies and logistic regression in the first stage, while Pearson product-moment correlation coefficient and Chi-square test of independence was used in the second stage. In-depth interviews were analysed using narratives techniques. From the results, credit policies, interest rates, inflation rates, monitoring, time of loan disbursement and banks regular visits significantly influenced credit risk perception. Appraisal of loans, governance and management control, screening and monitoring, credit assessment and government interference had no significant influence on credit risk perception. It was recommended that financial service providers should provide financial literacy to SMEs through training and workshops on how to invest the full loan amount in the intended project and also review interest rates regularly to commensurate with prevailing market conditions.
