Introduction
At the start of the business, it is natural for the proprietor/s to look for an institution that can support their ideas. In the introduction of the financial services in the market, it temporarily created the solution for the businesses. Banks are also considered as one of the largest financial institutions and large companies are relying most of their resources in commercial banks. Loans are not prohibited by the law, but the business, specifically the small and medium enterprises should recognize its different impacts.
Background of the Study and Problem Statement
Soft loans are the common types of financial sources that the small and medium enterprises took for the financial supports. The soft loan provides capital and aiming to strengthen the institutional capabilities of the enterprises. They are also charging low-interest credit lines which are ideal because there are controls from the government (ADB, 2007). Microfinance Institutions that lent soft loans are focus on the recovery of the livelihood program and there is a significant increase of these institutions and operating to accommodate the spread of the small-scale and medium sized businesses. However, these micro financing businesses strategically increase the interest rate which is perceived as a non-greedy strategy and there are also different impacts on the small and medium enterprises.
Research Objectives
The research has two main objectives that rooted in the main topic of the study. The first is to identify the impact of the interest rates in the small and medium type of businesses and the second is to make a call for the government in the regulation of the micro financing institutions that subjects high interest rates.
Research Questions
The study recognized the different approach in achieving the right answer to the stated problem. Therefore, there are provided questions to keep the study aligned to its objectives.
1. What is the usage of the interest rates?
2. What are the factors that the small and medium sized business considered in sticking to the idea of credit loans?
3. What are the common effects of multi-microfinance loans of the business?
Literature Review
There is a challenge in the efficiency and financial stability in every economy and it can be felt by the small and medium enterprises or SME. Honestly, majority of the financial framework of SMEs came from the financial institutions. The interest rate they set on the SMEs that are lower/higher than the prevailing market rates is an issue. The lack of the credibility of the financial institutions tends to bankruptcy while on the other hand; the SME that includes the lack of mentorship and skills, having communication gaps, and lack of awareness in the existing information in the market can also lead to total losses. Due to this complication inside the small proprietorship, the businesses pushed to turn to other financial services. The only purpose of the financial institutions is to support the business in this venture as long as it has the capability to ensure the existence of its operation. This is the great challenge of the SMEs in surviving the competition in the market (IISD, 2004). The burden of high interest rates and it places the risk in lending to SMEs (SEAF, 2004; Le and Nguyen, 2009). However, there are significant financial reforms that are focused on the interest rate deregulation, restructuring the financial sources, inviting the private financial institution, and easing the restrictions that lead to a diversified financial system. In this sense, the SMEs are more enthusiastic in another opportunity. The SMEs must have to demonstrate the capability of the business in establishing the risk management, its systems, processes, and procedures in the compliance of the financial requirements (ADB, 2007).
Methodology
The comparative case study is the applied method in the research. It is very effective since the study is looking for answers in the past literatures of studies. The appropriateness of the method also accommodated the opportunity to examine and measure the implications of the interest rates in financial institutions based on various settings. Through this method, the reforms to answer the deficiency in financial services are recognized.
Conclusion
It is crucial for small and medium-sized enterprises, particularly in the emerging economies to support all of the SMEs while at the same time, the businesses are seeking to an access for resources. They use the idea of credit to establish their business, improve the performance of their business, and/or develop some product. And all are aiming to gain an advantage against the other. It is very obvious that a new business is more focused in its financing other than improvement of the other aspect of the business. The SMEs should have an internal control on their financial aspects and have the knowledge on how to mange all their liabilities. They should also stick to one or two financial sources and establish a strong relationship because sometimes this simple interaction leads to a success.
References:
ADB, 2007. Proposed Loan Democratic Socialist Republic of Sri Lanka: Small and Medium Enterprise Regional Development Project. Report and Recommendation of the President to the Board of Directions of Asian Development Bank. [Online] Available at: http://www.adb.org/Documents/RRPs/SRI/36117-SRI-RRP.pdf. [Accessed 03 Feb 2010].
IISD, 2004. The ISO and Corporate Social Responsibility Issue Briefing Note: Small and Medium-Sized Enterprises. International Institute for Sustainable Development. [Online] Available at: http://www.iisd.org/pdf/2004/standards_sme.pdf. [Accessed 03 Feb 2010].
Le, N., & Nguyen, T., 2009. The Impact of Networking on Bank Financing: The Case of Small and Medium-Sized Enterprises in Vietnam. Theory and Practice, Vol. 33, No. 4.
SEAF, 2004. The Development Impact of Small and Medium Enterprises: Lessons Learned from SEAF Investments. Small Enterprise Assistance Funds. [Online] Available at: http://www.seaf.com/main_report.pdf. [Accessed 03 Feb 2010].
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