Challenges Facing Small and Medium Enterprises in Accessing Credit Facilities in Kandy District, Sri Lanka

Abstract

Small and Medium Enterprises (SMEs) play a vital role in an economy. This study aims to explore the challenges faced by SMEs in accessing credit facilities in the Kandy district of Sri Lanka. To achieve this, four key objectives were examined: investigating the impact of a lack of acceptable collateral on SME financing, examining information asymmetry as a challenge in SME financing, assessing the role of managerial expertise in SME financing, and exploring the impact of transaction costs on SME financing. Pecking order theory, transaction cost economics theory, imperfect information theory, and the resource-based view of the firm were among the pertinent theories that served as guidelines for the study. Utilizing quantitative data from SMEs in Kandy district, the study employed a descriptive research design. A sample of 200 SMEs was selected using non-probability sampling, specifically the convenience sampling method. The study used both primary data. The primary data were collected by using a questionnaire. The findings revealed that demographic and firm characteristics significantly influence SMEs' ability to address their financing challenges. The major issues identified were a lack of acceptable collateral, high transaction costs, and information asymmetry. Conversely, managerial expertise was not considered a significant challenge for SMEs in Kandy District, Sri Lanka, regarding their financing needs