Bank financing of SMEs in Togo. When the banker interprets the unspoken

Doctor Jean Koudjokjoum Tchangai

DBA Dakar n°5 (Sénégal)

Introduction

In developing countries, access to bank financing for small and medium-sized enterprises (SMEs) remains a major challenge. These difficulties are largely explained by pronounced information asymmetries and by structural constraints that characterize the relationships between SMEs and financial institutions. In this context, analyzing financing decisions from the bankers’ perspective appears essential to understanding the conditions under which SMEs gain access to bank credit.

Drawing on the full set of banks operating in Togo, this study examines financing decisions relating to SMEs that lack high-quality information, based on 22 interviews conducted with senior banking executives in the country. Indeed, in a context of strong information asymmetry, bankers must deal with financial data that are often considered unreliable, or even nonexistent. The study therefore highlights the formal or informal, as well as relational, strategies used by bankers to reconstruct missing information, along with the subjective criteria they mobilize in credit risk assessment and decision-making.

The findings reveal that internal bank-related factors—such as the objectives assigned to decision-makers or interpersonal relationships—as well as subjective elements linked to the SME owner-manager’s profile, including beliefs, lifestyle, nationality, or political engagement, may constitute discriminating factors in the decision-making process within this context.

Research Impact(s)

This research offers a renewed perspective on SME bank financing by adopting a rarely explored viewpoint—that of the supply side, namely the bankers who make credit-granting decisions. By privileging this supply-side approach, the study demonstrates how these actors, operating in a context of pronounced information asymmetry—particularly the opacity and insufficiency of financial documentation characteristic of many SMEs—are nevertheless able to make financing decisions.

The findings of our research reveal that, in response to these constraints, Togolese bankers rely on qualitative and atypical criteria, notably the quality of the business relationship, the firm’s reputation, and the attitude of the owner-manager. These informal practices depart from traditional frameworks based primarily on quantitative financial data. Conventionally, bankers use standardized financial ratios (e.g., working capital, working capital requirements, intermediate management balances, debt repayment capacity, self-financing capacity, etc.) to assess profitability, liquidity, financial structure, and credit risk. The practices observed in this study are distinguished by their subjective dimension, which proves essential for understanding the actual logic underlying SME credit allocation.

From a theoretical standpoint, this study contributes to the literature on information asymmetry and behavioral finance in the African context by showing how bankers, when confronted with local specificities, adapt their decision-making approach by acting as interpreters of the SME’s behavior and environment, thereby going beyond the traditional role of a purely financial analyst.

From a managerial perspective, the impact is threefold. First, the study provides banking institutions with an interpretive framework that helps formalize practices that are often implicit yet essential to risk analysis in contexts of high informational opacity. Second, it enables SMEs to better understand bankers’ implicit expectations and to adjust their posture accordingly in order to maximize their chances of accessing bank credit. Finally, it offers public authorities concrete levers for action to improve SMEs’ access to bank financing, including the establishment of incentive and constraint mechanisms encouraging SMEs to meet supply-side requirements, structural reforms (fiscal, judicial, etc.), and increased professionalization of support organizations in management, accounting, and taxation. The study also calls for the implementation of a comprehensive financial education and SME capacity-building program. More concretely, it recommends the certification of SMEs, the creation of an SME owner-manager indicator index inspired by that of the Banque de France, as well as support for and promotion of the establishment of credit insurance companies.

Research Foundations

 

This study mobilizes two complementary theoretical frameworks to analyze and understand bankers’ decision-making practices in an environment characterized by high information asymmetry. On the one hand, information asymmetry theory—through the concepts of moral hazard (Akerlof, 1970) and adverse selection (Stiglitz & Weiss, 1981)—helps explain banks’ reluctance to finance SMEs, which are perceived as riskier and more opaque, that is, less transparent, than large firms. On the other hand, the behavioral approach (Simon, 1947; Kahneman & Tversky, 1979; Shiller, 2003; Hirigoyen, 2008), which posits that financial decisions do not stem from pure rationality but are influenced by cognitive, emotional, and social biases (Honoré, 1998; Pompian & Wood, 2006; Péon & Calvo, 2010), makes it possible to better understand the decision-making process in this specific context.

Methodology

This research adopts a qualitative, inductive approach and is grounded in a constructivist epistemological stance. The empirical investigation is based on 22 semi-structured interviews conducted with decision-making executives from across the Togolese banking sector, with each credit institution represented by at least one respondent. Data analysis was carried out using the Gioia methodology (2013), which enables concepts to emerge from interviewees’ discourse and to be structured into theoretical dimensions. This approach led to the development of a decision-making model for credit granting in a context of high information asymmetry.

To go further

• Akerlof, G. A. (1970). The Market for “Lemons”. Quarterly Journal of Economics, 84(3), 488-500.

• Gioia, D. A., Corley, K. G., & Hamilton, A. L. (2013). Seeking Qualitative Rigor in Inductive Research: Notes on the Gioia Methodology. Organizational Research Methods, 16(1), 15-31.

• Hirigoyen, G. (2008). Biais comportementaux et gouvernance dans les entreprises familiales. Finance & Bien Commun, 31(1), 88-97.

• Honoré, L. (1998). Systèmes de contrainte, systèmes disciplinaires et décision face au risque. Le comportement du chargé d’affaires comme déterminant fondamental du risque de la banque. Revue Finance Contrôle Stratégie, 1(1), 85-106.

• Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291.

• Ndjanyou, L. (2001). L’informalité comptable dans les PME africaines. Revue Congolaise de Gestion, 6(1), 73-90.

• Peón, D., & Calvo, A. (2010). Using Behavioral Economics to Analyze Credit Policies on the Banking Industry. SSRN Working Paper No. 1831346. Disponible sur SSRN: https://ssrn.com/abstract=1831346

• Pompian, M. M., & Wood, A. S. (2006). Behavioral Finance and Wealth Management. Wiley.

• Shiller, R. J. (2003). From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives, 17(1), 83-104.

• Simon, H. A. (1947). Administrative Behavior: A Study of Decision-Making Processes in Administrative Organizations. Macmillan.

• Stiglitz, J. E., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. American Economic Review, 71(3), 393-410.

 

Keywords

SMEs, bank financing, credit granting criteria, bank financing decision, behavioral biases, information asymmetry, Togo.

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