Effect of development finance lending on financial performance of small and medium enterprises in Sri Lanka

Abstract

The purpose of this study is to identify the relationship between development finance lending on the financial performance of SMEs and determine what components of development finance credit have the most impact on the growth of SMEs. The study was adopted with a target sample of 120 registered SMEs within the ABC Bank PLC, Sri Lanka. Secondary data was collected for the study using internal documents from the SME section in ABC Bank PLC and annual reports. SME financial performance has been considered as the dependent variable, whereas development finance credit amount, development finance loan period, initial credit amount, and collateral requirement have been considered as independent variables. Data was analysed using descriptive statistics, correction and multiple regression approach. Findings revealed that development finance credit positively influences the financial performance of SMEs through the amount of credit provided, the initial credit amount, the collateral requirement, and the loan period granted by the bank, which affects the financial performance negatively based on the analysis. The study also found that all SMEs borrow credit to increase their financial performance. The study concludes that return improved with each consecutive loan, showing that microfinance facilities enhance the financial performance of SMEs in Sri Lanka with the evidence from ABC Bank PLC. The regression results propose that development finance credit gives more to the financial performance of SMEs and thus higher return.