Borrower Switching Behavior, Market Dominance and Bank Competition of Micro, Small and Medium Enterprises Credit in Zambia

Using data collected from a sample of MSMEs located in urban areas of five major districts in Zambia, this paper investigates the existence and size of switching costs among Micro, Small and Medium Enterprises (MSMEs) when borrowing formal bank credit. The authors (Mphuka, Simumba and Banda, 2013) find that MSMEs' selection of a 'main-bank' does not persist over time, signalling the absence of switching costs. Switching main banks also had no effect on lending interest rates – nor do banks use discounts on lending interest rates to attract borrowers from competitor banks. These results point to the existence of asymmetric information as the main explanation for the occurrence of high interest rates and low volume of credit allocated to MSMEs. The researchers suggest encouraging ‘relationship banking’ between commercial banks and MSMEs as a way of breaking down information barriers in order to reduce the upward mispricing of interest rates offered to these firms.