Psychological Biases and Decisions of Small and Medium-Sized Enterprises (SMEs) to Apply for Bank loans: A Study Based on Behavioural Finance

The purpose of this study is to underscore from the lens of behavioural finance the influence of psychological biases on the decisions of SMEs to apply for bank loans. To attain the objective, we adopted a mixed research method. Accordingly, in order to capture deeply the effect of psychological biases on the borrowing decisions of SMEs; interviews were conducted with 10 owners/managers of SMEs. Subsequently, survey questionnaires were used to collect data for the final phase of the study. Our sample consists of 400 SMEs operating in different sectors of the city of Douala. Both stratified and random sampling were used as sampling methods for the study. Logistic regression statistical technique was employed to analyse collected data. The results of the study revealed that control aversion, overconfidence bias and discouragement bias influence significantly the decisions of SMEs to apply for bank loans. From this study, it is observed that decisions of SMEs to apply for bank loans divert from orthodox finance paradigm, but are rather captured by psychological biases related to behavioural finance. As a result, behavioural finance provides relevant theoretical framework to understand the financing decisions of SMEs, which is essential in capturing the financing lacuna faced by SMEs.