The Effect of Credit Rationing on the Probability of SMEs Investing

This article examines the effect of credit rationing on the probability of borrowers and non-borrowers deciding to invest. Primary data from Indonesia’s automotive small-medium-sized enterprises (SMEs) was analysed using two-stage residual inclusion. We found that credit rationing (weak and strong types), reduces the borrower’s probability of investing and negatively affects firm performance. For non-borrowers, all types of credit rationing (quantity, transaction cost, risk and cultural) adversely affect the probability of investing. Three factors that could reduce credit rationing are: increasing collateral value, establishing risk-sharing schemes, and increasing banks competition. Our findings constitute a new step toward understanding the firms’ risk-sharing schemes to minimize asymmetric information in credit allocation.