The impact of borrowers attributes on the possibility of SMEs loan approval in HCMC, viet nam luận văn thạc sĩ

Key words: SMEs, loan approval, relationships with the bank, value of collateral, firm size, related business experience, share of investment, business plan... This research is practical

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

PHAN THI TRAN NGA

THE IMPACT OF BORROWERS’

ATTRIBUTES ON THE POSSIBILITY OF SMEs LOAN APPROVAL IN HCMC, VN

MASTER’S THESIS SUPERVISOR: Dr CAO HAO THI

Ho Chi Minh City, 2013

ACKNOWLEDGEMENTS

Firstly, I would like to express my gratitude to Dr Cao Hao Thi, my supervisor who has given a zealous support and advices during doing research period Especially, I am grateful for his enthusiasm in answering, reminding as well as his feedback, guidance and correction for me able to accomplish this thesis

Secondly, I would like to thank Dr Dinh Thai Hoang who taught data analysis, helped me analysis methodology and data process of this thesis as well

Thirdly, I would also like to thank all of my lecturers at International School of Business (ISB) – University of Economics Ho Chi Minh City (UEH) – for exchanging & sharing their knowledge and experience during my master course Enthusiastic assistance provided by the ISB’s executive board and staffs was also greatly appreciated

Next, I would like to say thank you for creditors, who helped me to conduct survey, gave suggestions and shared their experience in profession to do this research better

Last, I would also want to thank my friends and classmates who share their knowledge support, and work with me during time I do this study

Before a bank decides to invest into companies in a form of loan, they will put into consideration a lot of aspects In this decision making process, bank officers will take into account a lot of different kind of borrower’s attributes related to background and experience, the business and conditions surrounding it

This research is done by thorough literature review on concepts relating to six borrower’s attributes The analyzing result found there are only three among six borrower’s attributes which have positively related to possibility of SMEs loan approval The research model explained 47.3% the variance of the borrower’s attributes on the possibility of SMEs loan approval

Key words: SMEs, loan approval, relationships with the bank, value of collateral, firm size, related business experience, share of investment, business plan

TABLE CONTENT

ACKNOWLEDGEMENTS i

ABSTRACT ii

ABBREVIATION v

LIST OF TABLES vi

LIST OF FIGURES vii

CHAPTER 1 INTRODUCTION 1

1.1 Research background 1

1.2 Research Problem 3

1.3 Research objectives 5

1.4 Research scope 5

1.5 Research contribution 5

1.6 Research structure 6

CHAPTER 2 LITERATURE REVIEW 7

2.1 Approval loan 7

2.2 Borrower's Attributes 9

2.2.1 Relationship with the bank 9

2.2.2 Firm size 11

2.2.3 Value of collateral 12

2.2.4 Related business experience 13

2.2.5 Share of investment 14

2.2.6 Business plan 15

2.3 Lender’s human capital 17

2.3.1 Education 18

2.3.2 Lending experience 19

2.4 Research model 19

2.5 Hypotheses of this study 20

CHAPTER 3 RESEARCH METHODOLOGY 22

3.1 Research process 22

3.2 Measurement scale 24

3.3 Sample size 26

3.4 Methods of data collection 27

3.5 Methods of data analysis 28

3.5.1 Descriptive statistic 28

3.5.2 Testing the reliability 28

3.5.3 Exploratory Factor Analysis (EFA) 29

3.5.4 Multiple regression analyses 29

CHAPTER 4 DATA ANALYSIS 31

4.1 Result of Pilot survey 31

4.1.1 Testing the reliability of Relationship with bank and business plan 31 4.1.2 Exploratory factor analysis (EFA) 33

4.2 Result of official survey 34

4.2.1 Descriptive statistics analysis 34

4.2.2 Refinement of measurement scale 37

4.2.3 Hypotheses testing 41

CHAPTER 5 CONCLUSION 50

5.1 Findings 50

5.2 Managerial implications and recommendation 52

5.3 Research Limitations 54

5.4 Suggestions for further research 54

REFERENCES XI

APPENDIX A INTERVIEW QUESTIONS XVII APPENDIX B QUESTIONNAIRE XIX APPENDIX C DISCUSSION FOR EXPLAINATION XXVIII APPENDIX D REGRESSION RESULT XXIX

ABBREVIATION

SMEs: Small and medium enterprises

SPSS: Statistical Package Software for Social Science

EFA: Exploratory factor analysis

LIST OF TABLES

Table 3.1a Measurement scale for independent and dependent factors 25

Table 3.1b Measurement scale for control variables 26

Table 4.1 Reliability of Relationship with the bank (REL) 32

Table 4.2 Reliability of Business Plan (PLA) 32

Table 4.3 KMO and Bartlett's Test 33

Table 4.4 Total Variance Explained 33

Table 4.5 Rotated Component Matrixa 34

Table 4.6 Descriptive statistics 35

Table 4.7 Reliability of relationship with the bank (REL) 37

Table 4.8 Reliability of business plan (PLA) 38

Table 4.9 KMO and Barlett’s Test 38

Table 4.10 Total Variance Explained 39

Table 4.11 Rotated Component Matrixa 40

Table 4.12 Matrix Correlations between variables in equation regression 42

Table 4.13 Model Summaryb 44

Table 4.14 Regression analysis result 44

Table 4.15 Hypotheses summary 47

LIST OF FIGURES

Figure 1.1 SMEs’ contribution for economy by country 2

Figure 2.1 The Research model 20

Figure 3.1 Research process 23

Figure 4.1 The revised research model 48

CHAPTER 1 INTRODUCTION

1.1 Research background

Small and medium sized Enterprises (SMEs) play an important role in transitional economies and have high relevance for their economic policy of many countries Thus, governments throughout the world focus on the development of the SME sector to promote economic growth (Olawale & Garwe, 2010) In Vietnam, according to a Spring 2011 report the number of SMEs is nearing 400,000 SMEs represent 99 percent of the number of businesses of the country and occupy an overwhelming proportion in total number of country’s enterprises accounting for

77 percent and 87 percent by regular workforce and registered capital criteria in

2011 (Cuong, Sang & Anh, 2008) According to the government over 40% of GDP

is produced by SMEs From that, SMEs have vital and undeniable roles in promoting economic and social development in Vietnam They have made a significant contribution to the country’s advancement and enhancing the efficiency and the flexibility of the economy (Cuong, 2007) Apart from being a relatively dynamic sector in the economy, SMEs have role in creating jobs, maintaining high mobility of the labor market, and narrowing development gaps among localities of the country (Cuong, Sang & Anh, 2008)

Despite the positive contribution for economy, SMEs still face the difficulty in accessing loan So the financing for small and medium enterprises (SMEs) recently years has been a subject of great interest both to policymakers and researchers (Beck, Demirgüç-Kunt, & Pería, 2009) Because financing loan is necessary for

enterprises in the economic crisis period Especially for SMEs, accessing finance becomes more important because that helps them have capital to continue operating and developing However, with limited supply fund from financial institutions, but increasing financial demand of enterprises, how SMEs do to access loan that depends on many factors, including the borrower’s attributes and banks’ side ones And how the borrower’s attributes affect to the possibility of

SMEs loan decision-making which is the issue needs to research in this paper

The figure 1.1 illustrates a more in-depth look of the breakdown the small business impact on the economy by country

Figure 1.1 SMEs’ contribution for economy by country

Source: SMEs in Asian Report 2011–12; McKinsey Global Institute analysis

1.2 Research Problem

The capacity for SMEs will develop their potential in an economy depends on the availability of finance Finance in general and credit in particular is especially important for all of businesses as well as SMEs, since they are unable to finance themselves through retained earnings or equity financing Most SMEs rely on informal sector financing to meet their needs The main source of formal financing

is bank lending Despite the fact that financing is a major factor for growth of SMEs and the state-owned Commercial Banks (SOCBs) are beginning to extend more credit to the SMEs, most SMEs still face problems when accessing to bank finance And SMEs generally tend to be confronted with higher interest rates, as well as credit rationing (OECD, 1998)

In Vietnam, according to World Bank’s assessment, one of the biggest weaknesses in business environment is the problem of access finance (TTVN, 2012) Besides, as announced by the Vietnam Chamber of Commerce and Industry (VCCI) on 14 March, 2012, Vietnamese SMEs have difficulties in accessing loans rather than big enterprises (LD, 2012) Because of unable accessing finance, many Vietnamese SMEs stop operating temporarily and go bankruptcy as lack of fund (Chi, 2012)

There are many factors to be considered by a bank before a loan approval is made Coleshaw (1989), states if there is a single bad loan, the bank will suffer not only a financial loss, but also significant damage to its reputation (as cited in Ottavia, 2011) These negative impacts are why, before any decisions are made on loan

applications, the credit officers perform extensive analyses to screen out potential bad loans In this decision-making process, the bank officers need to consider different attributes related to the borrower's background and experience, the business and the conditions surrounding it (Bruns, Holland, Shepherd, & Wiklund, 2008) And these attributes may affect the likelihood of loan approval by credit institutions in general and in banks in particular

As mentioned above, finance is an essential element for business maintains and develops them Yet, not all enterprises can have enough effort to do with their internal capital, they often base on external capital that is loan from banks in usual However, with the limited fund and in order to avoid the repay risk, banks as well

as creditors have to put into consideration carefully to choose the best firms to grant loan Therefore, there will be many SMEs cannot achieve credit that is the problem need to do in this study

Furthermore, in Vietnam, there are not many studies which gave explanations on the relationship between borrower’s attributes, lender’s human capital and possibility of loan approval This research is practical significance for accessing loan and exploring the impact of the borrower’s attributes on the possibility of loan approval; and how lender’s human capital effect to likelihood of loan approval; and just focuses on loans to SMEs because they occupy majority among the number of businesses in Vietnam

1.3 Research objectives

The objectives of this research are to:

- Identify borrower’s attributes effect to the possibility of loan approval from financial institutions as well as banks in Vietnam

- Find down the key and decisive attribute affects to the possibility of loan approval

- Recommend for SMEs in Vietnam when applying loan application in order

to receive loan grant

1.4 Research scope

The survey will be conducted on commercial Banks including foreign, owned-state and corporate banks in HCMC, Vietnam The respondents will be these banks’ creditors who are responsible for collecting and evaluating information regarding

to prospective borrower as well as plays the decisive role in loan approval

1.5 Research contribution

The research result will help SMEs in Vietnam focus on three attributes that strongly impact loan decision are relationship with the bank, related business experience, and business plan in order to receive the loan grant highly when applying a loan application Especially, new enterprises with less related business experience should consider the factor of relationship with the bank and well-prepare the business plan so that they can achieve loan approval

1.6 Research structure

This research includes five chapters from chapter 1 to chapter 5 The first chapter

or introduction generally introduces the research background, research problems, research objectives, research scope, and research contribution

Chapter 2 is called literature review In this part, it presents concepts and theories relating to loan approval (5Cs principal), borrower’s attributes and lender’s human capital affect to loan decision-making in previous studies Based on theories, initial research model and hypotheses used for the research are formed

Next, Chapter 3 is research methodology that will show the research process and data collection There are 3 elements in Data collection consisting of data sample, data size and method using in this research

Then, Chapter 4, data analysis will reports the analysis results of data collected from the survey

The last chapter is conclusions, this will summarize the findings; discuss the managerial implications and recommendation based on the results in chapter four; and show the research limitation as well as the suggestion for further research

CHAPTER 2 LITERATURE REVIEW

The purpose of this chapter is an overview of relevant literature affecting to the loan making-decision These include the approval loan and borrower’s attributes which have been conducted by previous researches Based on these studies, conceptual model is proposed

2.1 Approval loan

In the banking industry, the credit department is the largest income source for banks (Ottavia, 2011) This income, in the form of loan interest and provision, makes up a significant percentage of a bank's assets (Golin, 2001) Therefore, loan quality is an important criterion in establishing the creditworthiness of a bank (Golin, 2001) It is a guarantee to ensure that the loans released will continue to work and to generate profit for the bank (Booth, J R & Booth, L C., 2006; Rosman & Bedard, 1999) Loans are given based on the belief that the borrower can be trusted to repay the debt (Golin, 2001) Before granting the loan, the creditor will consider the nature of business, how it run, the micro and macro economics as well as collateral assured by borrowers (Ottavia, 2011) In the banking industry, the loan evaluation process has been standardized for the sake of systematic evaluation The traditional practice which banks apply to process and estimate loan is 5Cs principle

The first C is Capacity that reflects the borrower's financial condition (cash flow &

payback period of project), future prospects, firm ability and management experience (Riding, Haines & Thomas, 1994) After analyzing this feature, the

creditor will give conclusion to decide whether business’ cash flow has enough to repay the loan or not (Golin, 2001; Sauder and Allen, 2002)

The second C stands for Capital which corresponds to the equity or owner’s share

to business’ assets (Golin, 2001); Money contributed to support the firm's operation, and the firm's survival prospects (Barret, 1990)

The third C represents Collateral It is any form of asset pledged as a guarantee in

exchange for the loan from the bank by firm Or it can be in a form of guarantee from the third party This assets or guarantee are used to assure loan in case the risk loan and the business cannot repay to the banks (Golin, 2001)

The fourth C is Character that relates to the borrower's reputation, age, gender, risk

profile, business experience and apparent quality, integrity, stability and willingness to repay the loan (Golin, 2001; Riding, Haines, & Thomas, 1994; Saunders & Allen, 2002) The character is intangible quality which is as important

as financial information (Barrett, 1990)

The last C is abbreviation of Conditions, they mention to both the macro and

micro economic conditions surrounding the firm's business operation All economic condition such as recession, growth, interest, and so on, which can affect

to business as well as the ability to repay loan (Riding, Haines, & Thomas, 1994)

All loan applications are applied to the banks will be screened comprehensive and careful analyses using the 5Cs as the principle of loan decision-making (Riding,

Haines, & Thomas, 1994) The 5Cs principle provides a framework of loan evaluation for loan officers

2.2 Borrower's Attributes

Because there are many borrower’s attributes to be concerned in loan decision process, this research will just focus on six factors; in which, the first five will represent for five Cs in principle of credit and one is business plan that is suggested to add in this research by many bank’s creditors through the interview before designing first draft questionnaire

The first five attributes include: Relationship with the bank is replaced for the fifth

C, condition; Firm size is modified by the first C, Capacity; Value of collateral is very the third C, Collateral; Related business experience is derived from the fourth

C, Character; And the last one, share of investment is very the second C, capital

2.2.1 Relationship with the bank

Firstly, coming to the relationship with bank, that refers to a lender’s role in gathering information about the firm through the provision of banking service and then using the information to decide whether to lend that firm (Dolan, Brouard & Riding, 2011) Addition, according to Berger & Udell (1998), the most important feature of SMEs financing is the relative information opacity of the former and relationship between lender and borrower can help overcome opacity

According to Rajan (1992), banks that maintain more information about the borrower will be easy to control the credit expense for profitable projects By

doing this, it will push the borrower to put in pay attention And the more information banks have, the more exact the analysis is that they can reduce higher risk (Rajan, 1992) The respective literature measures the intensity of the relationship by the duration of relationship And the duration is expected to affect

to information of the bank stock In particular, the studies about credit availability effects of relationship banking, which include Petersen and Rajan (1994), Cole (1998), and Chakravarty and Yilmazer (2009) use the length of interaction between borrower and lender in order to measure the strength of a relationship, but report mixed results The theoretical research on bank-borrower relationship provides opposing views on how the length of relationship should affect loan decision-making

Thus, the relationship is also measured by trust which may generate from positive experience in the past (Lehmann & Neuberger, 2001) The nature of the relationship will also influence the quantity and quality of information available to the bank With close relationship, the bank understands the operating environment

of a particular business Furthermore, relationship provides the basis for understanding customer need and resource Besides, the information also implies that both parties will have a better understanding of each other (Lehmann & Neuberger, 2001) In order to proxy mutual trust in the bank-borrower relationship, Lehmann & Neuberger (2001) have introduced the variables relating to experience

in the past, the obligation to partner, the impression of the stability of the relationship and the flow of information And also according to these researchers, the bank can only meet customers need if the firm manager provides appropriate

and timely information This cooperation results in stable relationship, in which the partners feel obliged to each other While past experience may reflect the reciprocity relationship (Blois, 1999), and Fisman and Khanna (1999), have suggested obligation to the partner may be based on trust that will create stable relationship And the stability of relationship depends on consistent behavior, the sense of deterrence-base trust (Lehmann & Neuberger, 2001)

Therefore, it can be concluded that the firm with a stronger relationship with the bank lowers the loan officers' screening level, and accesses loan easier Then, the following hypothesis is proposed:

H1: A relationship with the bank is positively related to the possibility of loan

approval

2.2.2 Firm size

Firm size is related to the business scale and the business scope Both represent the organisational capital that offers survival benefits (Bercovitz & Mitchell, 2007) A study by Mitchell (1994) has proved that larger firms and businesses tend to survive longer than smaller companies In Vietnam, when mentioning about firm size, people think about total asset or the number of employees Size, however in this research as the previous study, is related to sales levels, directly affects the profitability and the sustainability of the business (Bercovitz & Mitchell, 2007; Silverman, Nickerson, & Freeman, 1997)

In fact, banks give different treatment based on the size of the companies Smaller companies face more difficulties to acquire a loan rather than their larger

counterparts for reasons such as a less-comprehensive track record, limited performance portfolio, or low asset possession (Harhoff & Körting, 1998) Hence, there is higher likelihood for smaller companies to be rejected when they apply for

a loan Larger firms are higher sustainable and more likely to survive in the business, resulting in a lower risk for the bank In addition, they also have more bargaining power Therefore, it is easier for them to obtain loan approval

H2: Firm size is positively related to the possibility of loan approval

2.2.3 Value of collateral

The next is value of collateral, collateral is any form of assets assured as a guarantee in exchange for the loan from the bank Addition, Ghosh et al state the value of the collateral offered by a firm also influences the credit ranking behavior

of the bank (cited in Okurut, Olalekan, & Mangadi, 2011) Collateral is considered

as the last resort to recovery of the loan in a risky case such as bankruptcy, where the bank can sell the collateral to recover a part or total of the loan Thus, collateral can be an outstanding value for the bank when assessing the creditworthiness of the firm (Bester, 1987) Also before, after obtaining the loan and offering the collateral, borrower applicants wish to fulfill their obligations and repay credit on time basis in order to avoid losing the collateral

A study by Menkhoff, Neuberger and Suwanaporn (2006) showed that the banks use collateral to reduce credit risks If collateral is mortgaged to the bank, which will push the borrowers more effort because they have their assets hold by the bank It also reduces the moral hazard when banks lend money out (Jiménez &

Saurina, 2004) Banks expect higher collateral from borrowers against higher risks Collateral is as a safety net may increase the banks' willingness to take risks

According to Jiménez and Saurina (2004), collateral reduces a bank's risk exposure and provides it in case of less careful and to take more risks Collateral can also be seen as an instrument to ensure good behavior from the borrowers' side (La Porta

et al., 2003) Borrowers are obliged to try their best to perform their business and repay loans as the bank's regulation or there is a risk that they will lose the asset once the loans default A recent case study done in Portugal by Dermine and de Carvalho (2006) also supports this argument and found a significant positive relationship between collateral and loan default recovery It can be concluded that the higher the value of collateral pledged to cover the loan, the more pressure for borrowers to perform according to the bank's requirements Therefore, the hypothesis is proposed:

H3: The value of collateral is positively related to the possibility of loan approval

2.2.4 Related business experience

Knowledge is cumulative (Arthur, 1989) From their accumulated knowledge and experience, entrepreneurs gain their capacity (Minniti & Bygrave, 2001) This will help them the how to contribute both business survival and growth f(Cooper, Gimeno-Gascon, & Woo, 1994)

According to Ottavia (2011), businessmen make their decisions based on specific knowledge about the market (related to technical aspects, products or industry) and

general knowledge about business (how to be entrepreneurial) Both of them are accumulated through experience, learning-by-doing or direct observation (Minniti

& Bygrave, 2001) Whatever they do, they also increase their capabilities and establish managing and administrative skills These skills of problem solving are patterns constructed from experience; the successful solutions of problems accumulated from problems happened in the past (Nelson & Winter, 1982)

In the case of a default loan, the more experience gained, as reflecting the older firm age, the higher the probability of the firm recovering from the default (Dermine & de Carvalho, 2006) A more experienced firm will be more able to survive from a default status Therefore, the firms obtain experience and skills over time, they will have a greater chance of survival and achieving business success Thus, when these firms apply for a loan to the bank, it will create a more favorable and advantageous condition to be accepted by the bank Therefore, the following hypothesis is proposed:

H4: Related business experience is positively related to the possibility of loan

approval

2.2.5 Share of investment

Share of investment relates to how much capital is invested by the owner towards the operation of the firm Financial capital, equity is an important fund for businesses to operate, against random shocks and make it possible to develop business It also contributes to both business survival and growth (Cooper et al.,

1994) The more capital is owned by the firms, the higher possibility there is for the firms to grow

Financial capital has a high influence on a firm's survival (Bates, 1990) And insufficient financial fund lead to business failure (Chandler & Hanks, 1998) Owner's share of investment is one of the major considerations in loan assessment because it affects the ratio analyses upon which the loan decisions are based (Vaughn, 1997) If the owner invests more capital into the firm's operation, she will share more business risk with the lender, leaving banks with relatively lower risk

H5: The owner's share of investment is positively related to the possibility of loan

approval

2.2.6 Business plan

Business plan is an indispensable element for a loan application and decision process as well As we know, most potential funders wish to see a business plan as

a first step in deciding whether or not to invest (Mason & Stark 2004) As Barrow

et al (2001) noted: “Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan” Kuratko and Hodgetts (2001) suggested that the business plan is the minimum document required by any financial source The business plan is therefore the first – and possibly only – substantial contact that a potential funder has with the entrepreneur (Shepherd and Douglas, 1999) As Barrow et al (2001) noted that the business plan is the ticket of admission giving the entrepreneur his first and often

only chance to impress prospective sources of finance with the quality of the proposal

Besides, the primary concern of the banker is the risk that the loan will not be repaid Accordingly, the most interest of a banker is financial situation of a business that reflects whether the business can repay the debt, and whether assets are available from either the business or the entrepreneur to secure the loan if business fails A business plan that is used to approach a bank for a loan, must therefore contain sufficient information for a banker to make this assessment and

to indicate how the loan will be repaid in the case the business performs below expectations (Smith and Smith, 2000) It is normal practice for bankers to compare the financial information in a business plan against industry averages

In evaluating the credit worthiness of a customer, the lending officer has to evaluate the firm’s ability to respond to changing conditions and develop and implement effective strategies (Berger & Udell, 1998) For this purpose, the customer’s business plan is as part of the strategic planning It is an indicator of the ability of management to communicate the strategy of the firm to external parties The firm’s strategy should be clear and consistent in order to persuade external parties, such as banks, who make commitments to the firm’s future success (Sargent and Young, 1991) An SME that shows its intentions in a formal plan will minimize confusion and enable the lending officer to better understand the business

In this paper, the definition of business planning is based on the theory from prior researchers Business planning is defined those efforts by firm founders to gather information about a business opportunity and to specify how that information will

be used to create a new organization to exploit the opportunity (Castrogiovanni, 1996) Another supposed business planning the processes of gathering and analyzing information, evaluating required tasks, identifying risks and strategy, projecting financial developments, and documenting these things in completed plan (Sexton and Bowman-Upton, 1991) From the theory, it is concluded that business plan is an important and necessary factor for a loan application and lending decision process as well

H6: The business plan is positively related to the possibility of loan approval

Above are borrower’s attributes that affecting to the possibility of SMEs loan approval

2.3 Lender’s human capital

Besides the borrower’ attributes, the loan decision-making process is also affected

by one of the factors within the bank is human capital (Dimov & Shepherh, 2005) which includes knowledge, skill, ability, attitude, talent & experience Coleshaw (1989) said human judgment plays an important role in loan decision Human capital takes an important role in various organisational activities such as decision making, strategic planning, and product development, forecasting and marketing (Van Buren, 1999)

The sets of competence and experience can be performed by the loan officers' education backgrounds, their experience related to lending activities, and most specifically, their recent exposure to SME loan-application processing (Bruns et al., 2008) Those three human capital attributes reflect the loan officers' accumulated experience on the SMEs loan evaluation procedure and their competency to perform the job (Ottavia, 2011) However, this paper just focuses

on two human capital factors, education background and lending experience Because this research just do survey on business creditor, not individual creditor; and Vietnamese commercial banks mainly finance for SMEs, so the period loan officer works in lending department is almost serve for SMEs Each loan officer with different human capital will provide various performance in assess as well as lending decision-making for loan application

Below are two lender’s human capital factors that have been used in the previous study by Bruns et al (2008)

2.3.1 Education

Education is broad-based skills that can be applied to a variety of responsibilities and is generally used as a standard for general human capital (Gimeno, Folta, Cooper, & Woo, 1997) Loan officers with higher education level are considered to have a broader knowledge, information processing, and problem-solving skill to make a more effective and faster decision; and also higher learning capacity (Cohen & Cohen, 1983; Forbes, 2005)

2.3.2 Lending experience

Lending experience is defined as specific human capital that can be measured by the skills gained from experiences related to lending activities (Bruns et al., 2008) The loan officer's expertise and subjective judgment are the key factors in loan decision making (Saunders & Allen, 2002) The more lending experience the loan officer has obtained, the higher her self-successfulness will be (Wood & Bandura, 1989) Loan officers with greater lending experience will have different viewpoints, and reach different solutions regarding loan applications compared to those with less experience (Gavetti & Levinthal, 2000)

2.4 Research model

In order to rate the possibility of loan approval in the commercial banks in Vietnam, borrower’s factors are considerate to effect directly, and the six borrower’s attributes will be used as explaining variables The model is presented

in Figure 2.1 In this model, there were six independent factors comprised from the borrowers’ attributes including relationship with the bank, firm size, value of collateral, related business experience, share of investment and business plan; control variables consisting of education and lending experience, were generated from lender’s human capital; and a dependent variable was the possibility of loan approval

From the literature review, the previous session introduced the borrower’s attributes identified in previous study This session will present a Research model which will be used to explore the relationship between borrower’s attributes and

the possibility of loan approval in Vietnam And each attribute can generate the different effect level to possibility of loan approval in each observation The contents mentioned below are research hypotheses based on study model

Figure 2.1: The Research model

2.5 Hypotheses of this study

H1: A relationship with the bank is positively related to the possibility of loan

approval

H2: Firm size is positively related to the possibility of loan approval

H3: The value of collateral is positively related to the possibility of loan approval

Borrowers’ attributes

Lender’s human capital

- Education

- Lending experience

H4: Related business experience is positively related to the possibility of loan

approval

H5: The owner's share of investment is positively related to the possibility of loan

approval

H6: Business plan is positively related to the possibility of loan approval

In summary, this chapter presented a general literature review for loan approval, 5Cs principal in credit; borrower’s attributes consisting of a relationship with the bank, firm size, value of collateral, related business experience, share of investment and business plan; and concept of human capital From these theories and previous research framework, the research model and hypotheses were established

The next chapter would present the research methodology for this study

CHAPTER 3 RESEARCH METHODOLOGY

Chapter 3 would present research methodology which was the method, the way used to test, analysis this study This chapter included five steps First, research process which showed steps to do research; the second was scale measurement that mentions scales of variables measured; the third was sample size; the next was method of data collection showing the way to collect data; and the last one was the method of data analysis, the method which researcher chose to analysis

3.1 Research process

From problem of accessing financial fund of Vietnamese SMEs in society and basing on the previous literature and studies, author had formed this subject, developed model Then the research design would be conducted to test model and hypothesis After that it was the conclusion, criticism and solution for analysis result; and the limitation of research as well The research would be conducted in three main steps and presented in Figure 3.1

Step one: Indentify the research problem, then gathering the literatures related to

problem from the previous studies and develop research model After that, interview directly would be conducted with 10 participants, creditors to design the draft questionnaire for pilot survey This step was sure the initial Research framework, its variables and the concepts regarding the critical factors developed

in previous session were suitable with Vietnamese banks

Step two: Using the draft questionnaire to do pilot survey which purpose was to

preliminarily test the reliability of the factors used, the logicality and suitability of

the questionnaires and if there should be any modification or improvement needed Reliability analysis was used to test for the consistency of the measurement Researcher would come to creditor’s office to issue questionnaires and collected at spot; and sent questionnaires to individual mail to do survey

Step 1: Design draft questionnaire

Step 2: Pilot survey and design final questionnaire

Step 3: Final survey and data analysis

Figure 3.1: Research process

Step three: Conducting final survey, collecting data survey, then analyzing data

and writing the report In this step, the official questionnaire was finalized following the findings from the pilot survey The official questionnaire was made

in both English and Vietnamese version and the targeted respondents are creditors who should have a deep view on the questions asked from more than 15 commercial banks The measures were presented in Table 3.1a The questionnaire

Pilot survey Test

reliability Test validity

Final questionnaire

Final survey Collecting

Research model

Direct Interview

First draft questionnaire

was designed to study the impact of borrower’s attributes on possibility of SMEs loan decision-making in Ho Chi Minh City, Vietnam After survey, collecting data would be done Next was using SPSS to analyze and the last was writing report

3.2 Measurement scale

All the attributes of independent factors and dependent factor from the model in this research were cited from many previous studies Basing on the literature review and scale which many researchers had used before to established scale measurement for this research There were seven main variables include six independent factors named relationship banking, firm size, collateral value, related experience, share of investment and business plan; and dependent factor namely possibility of loan approval In that, they divided into two scales, Likert and ratio

as follows:

Likert scale

The factor of relationship banking and business plan were measured by 5 items and

3 items Both two factors used Likert scale from 1 (completely disagree) to 7 (completely agree) If the participant in survey responded statements about two factors of relationship banking and business plan in questionnaire is completely disagree, scored (1), but completely agree scored (7) And these items were presented in table 3.1a

The factor of possibility of loan approval was measured by the question “How would you rate the probability that you would support this credit application?” and used scale from 1 (highly unlike) to 7 (very likely)

The factors and measurement scales using for this research is summarized in Table 3.1a

Table 3.1a Measurement scale for independent and dependent factors

No Attributes or Factors Measurement Scale Author

Berger &

Udell (1995,2002)

Positive experience in

Obligation to the borrower

Fisman and Khanna (1999)

Willingness of the borrower to inform about the problem

Lehmann, E.,

& Neuberger,

D (2001)

Stability of the relationship

2 Firm size

(REVE) (F2) Annual sale levels Ratio

Bercovitz & Mitchell (2007)

Ratio

Menkhoff, Neuberger and Suwanaporn (2006)

Sexton and Bowman- Upton (1991)

Information about the market and competition Completed business plan

Likert scale (from 1 – 7) Ottavia (2011)

Ratio scale

Four rest factors, firm size, collateral value, related experience and share of investment were measured by a related question for each attribute and use ratio scale in the answer That means the respondents will answer by specified number

Besides, the model also adds control variables Their measurements were presented in Table 3.1b

Table 3.1b Measurement scale for control variables

3.3 Sample size

The sample size was determined follow as technique of multi variables analysis Factor analysis and multiple regression methods were used for this research In factor analysis, the sample size should be as large as possible with the minimum equals five times the number of variables analyzed, n > = 5*m, with m is the number of variables (Hair, 2005) In this research, there were 16 variables, so sample size should be greater than n = 5*16 = 80

1 Education

(EDU) (D1) Dummy variables

1 –> University

0 –> Post graduate

0 –> Others

In addition, according to Tabachnick & Fidell (2011), in multiple regressions, the sample size should be minimum n = 50 + 8*k, with k is the number of independent factors In this study, there were six independent factors and two control variables divided into two categories and four categories And total was ten factors, so sample size was at least n = 50 + 8*10 = 130

From two samples size above, the larger was chosen to do Therefore, the sample size should be more than 130 However, this research just collected 120 questionnaires after conducting survey and which were designed in English and translated into Vietnamese, delivered to creditors of commercial banks including domestic banks and foreign-owned banks in HCM city, Vietnam

3.4 Methods of data collection

The questionnaires were conducted by direct interview, issued directly to respondents and sent email to the personal email of the participants whom research could not meet directly, so they responded by email The respondents varied from banks with various demography backgrounds Data were collected solely from loan officers, or creditors of commercial banks including foreign banks operating

in Vietnam

In total, 150 questionnaires were distributed to loan officers, 53 sets were directly collected on the spot, 67 were sent later by email, and 30 were not returned So there were only 120 questionnaires collected successfully

3.5 Methods of data analysis

After collecting data, data analysis would be done through methods author chose to

do analysis The technique used to be applied to analyze data was SPSS software (statistical package for social scientists) This research would also use SPSS to do descriptive statistics, reliability analysis, valid scale, and regression Below steps would show details for each part

3.5.1 Descriptive statistic

Descriptive statistics provides us with the techniques of numerically and graphically presenting information that gives an overall picture of the data collected The researcher used Pearson’s correlation co-efficient calculation after data was aggregated to turn categorical data to numerical representation that required numerical methods from such, descriptive statistics, frequency tables, graphics, and correlation Tables

3.5.2 Testing the reliability

The Cronbach’s alpha is carried out in order for testing the reliability of the measurement scales According to Nunnally and Burnstein (1994), Cronbach’s Alpha each scale over 0.6 is acceptable Besides, in order to increase the Cronbach’s alpha of the scales, the variables which the item-total correlation should be greater than 0.4 will be maintained and delete variables have factor loading less than 0.5 in Exploratory Factor Analysis (EFA)

3.5.3 Exploratory Factor Analysis (EFA)

After refining the reliability of measurement scale is acceptable, the Exploratory Factor Analysis (EFA) is conducted to test the validity of the measurement of scales to find down the relationship between variables Hair (2006) supposes, in order to evaluate correlation the variables are correlated in total and extracted variance meets the requirement:

- Barlett’s test is smaller 0.05 (pvalue<0.05)

- The KMO index is greater than 0.6 (the range from 0 to 1)

On the other hand, according to Gerbing and Anderson (1988) believed that principal Component and Varimax, analysis is just effective if Eignvalues is larger than 1 (>1), Variance Extracted over fifty percent (>50%) and coefficient of factor loading is greater than 0.5 And the result of EFA is Component Matrix or Rotated Component Matrix

3.5.4 Multiple regression analyses

The multiples regression analysis is used to:

- Predict the value of dependent variable basing on the value of independent variables

- Explain the impact of changes in independent variables on dependent variable

However, this thesis just used the multiples regression analysis to explain the impact of changes in independent variables and control variables on dependent variable

In this research, dependent variable was possibility of loan approval, independent variables were borrower’s attributes and control variables were factors of lenders’ human capital So regression analysis would be used to test the impact of borrower’s attributes on possibility of loan approval Moreover, through the result

of regression analysis, researcher would also test whether the variables of lenders’ human capital effected on the possibility of loan approval or not

In short, Chapter three introduced three main steps of research process were designing draft questionnaire; pilot survey and design final questionnaire; and final survey and data analysis Addition, measurement scales for independent factors, borrower’s attributes; the dependent factor, possibility of loan approval; and control variables, lenders’ human capital were presented in the Table 3.1a and 3.1b Furthermore, method of data collection and method of data analysis were introduced clearly This thesis applied for methods of data analysis such as descriptive statistic, reliability analysis (Crobach Alpha), validity analysis (EFA), and multiple regression

CHAPTER 4 DATA ANALYSIS

This chapter would show the assessing measurement and result of hypotheses testing, research model about the impact of borrower’s attributes on possibility of SMEs loan decision-making in Ho Chi Minh City, Vietnam That included the pilot survey result of 44 samples, and the result of 120-sample official survey The structure was below

- Analyzing the reliability scale and the valid scale of pilot survey

- Analyzing the result of official survey

+ Sample descriptive statistics

+ The reliability and the Exploratory Factor Analysis (EFA)

+ Hypotheses testing (multiple Regression analysis)

+ Summary

4.1 Result of Pilot survey

Before conducting the final survey, a pilot survey on a small sample size (n=44) was done through creditors in order to establish a high degree of reliability and valid of the measurement scales; Using Crobach’s alpha to test reliability and the Exploratory Factor Analysis (EFA) to test valid scale

4.1.1 Testing the reliability of Relationship with bank and business plan

As the result of shown in the Table 4.1, the factor of relationship with the bank (REL) consisted of five variables (REL1, REL2, REL3, REL4, REL5), its Cronbach’s alpha was 0.895, larger than 0.6, so the scale was reliable; and all the

Item-Total correlation were greater than 0.4 Therefore, these variables were accepted for Exploratory Factor Analysis (EFA) later

Table 4.1 Reliability of Relationship with the bank (REL)

Similarly, the factor of business plan (PLA) with 3 variables (PLA1, PLA2, PLA3) had Crobach’s alpha coefficient 0.921, presented in table 4.2 Despite over 0.9, not

so good, it was impossible to say this measurement was not reliable due to there was not enough sample size Yet, all the Corrected Item-Total Correlations of this factor were larger than 0.4 So these variables were accepted for Exploratory Factor Analysis (EFA) later

Table 4.2 Reliability of Business Plan (PLA)

Relationship with the bank (REL): Cronbach’s alpha = 0.895

Variables Scale Mean if

Item Deleted

Scale Variance

if Item Deleted

Corrected Total Correlation

Business plan (PLA): Cronbach’s alpha = 0.921

Variables Scale Mean if

Item Deleted

Scale Variance

if Item Deleted

Corrected Total Correlation