Abstract for: Adverse Selection in SME Financing: When Both Bank and Innovative Entrepreneur Lose

SMEs are gaining increasing importance in the global economy. Compared to large enterprises, they suffer many more obstacles, a major group of which are financial obstacles. In the Iranian context these obstacles are even more pronounced for innovative SMEs. According to the Global Competitiveness Report published by the world economic forum, in Iran, it is too difficult to get a loan without adequate collateral and by only a good business plan. In such a setting, firms who have an innovative entrepreneurial idea will suffer the most. In this paper, using a system dynamics model it is demonstrated that despite the fact that banks are using tight measures to reduce their risk, the situation for both bank and SME worsens over time. This leads into larger amounts of Bad-debts for banks and reduced “ease of access to loans” for SMEs. A number of policies which may improve the situation and lead into mutual prosperity for bank and SME have been proposed.