An integrated approach to financing small contractors in developing countries: A conceptual model

Lack of access to bank finance is one of the major constraints on the development of small contractors in developing countries. Efforts by governments and interested donor agencies to mitigate the problem have achieved little. Banks perceive that the risk and transaction costs involved in dealing with small businesses in general are high. They also lack information about small business owner-managers and their businesses to better evaluate their loan proposals. Furthermore, several factors make it difficult to acquire adequate collateral to compensate for the risk. Theoretical and empirical analysis has recognized the importance of developing a closer working relationship between the bank and the small business in addressing the problem and, hence, improving the latter's access to bank loans. Microcredit schemes, which dwell on the principles of small business-bank relationships, have been successful in this respect. This paper reviews the factors affecting bank financing of small businesses and examines their implications for small contractors in developing countries. Based on the concept of microcredit, a model for financing small contractors in developing countries has been developed.