DETERMINANTS OF SME FINANCE: LESSONS FROM KOSOVO

In this study, we investigate the determinants of access to finance for small and medium enterprises (SME-s) in Dukagjini region, Kosovo. To contribute to the SME financing literature this paper uses the data received from interviews based on a self-organized questionnaire with 243 SME-s in Dukagjini region. Through linear regression model key factors are identified which determines SME growth financed by banks. The empirical results indicate a positive correlation among variables firm’s age, size, business plan and financial performance to the sources of financing and the investment growth. We found evidence that firms operated with more number of owners and pledge of collateral have higher credibility to obtain bank financing. The paper provides some important conclusions and implications for policymakers and entrepreneurs.The discussion of the relevant literature related to the access of SME-s finance, as well as to investment finance is of particular importance. According to Beck et al. (2006), using World Business Environment Survey (WBES) found that absence of long term bank finance of SME-s is the second most important financing constrain, while collateral and high interest rates are on the first place. It should also be stressed that the small firms come with more difficulty to loans since they encounter higher transaction costs and higher premium risks, for they are more fragile and they offer lower collaterals (Beck et al., 2006). Audretsch and Elston (2006) also emphasize that small firms faced higher financial difficulties than large one. Some other authors who have worked in this direction (Beck et al., 2006; Oliveira and Fortunato, 2006) can find similar argument.Beginning from the traditional theory, the changes in the structure of capital influences the cost of financing and the value of firms, and, thus, there is an optimal level of financial advantage. Based to neoclassical theory of investments, internal and external sources of financing are perfect substitutes. Therefore, some scholars argue that the cost of capital and the market value of the firm are independent from the value of the firm (Modigliani and Miller, 1958). Thus, the theory of M-M started with the following premises: there are no taxes, there are no transaction costs, there are no bankruptcy costs, the equal cost of debt for companies and for investors, etc. One the other hand. It is well known in the real world, there are taxes, transaction costs, bankruptcies, differences in lending, asymmetry of information, the impact of debt in profit.Different author’s uses firm size as a proxy for better credit quality and showed that it can positively affect the access to credit. The growth of SME-s can be measured in different ways, including the growth of sales, profits, or number of employees. As the firm gets larger, it can acquire more tangible assets that can be useful for banks in assessing the credit risk of the firm. The ability of SME-s to grow depends on a large measure from their potential to invest in the restructuring and innovations. All these investments require capital, so is required access to finance.