Showing papers on "Collateral published in 2014"
TL;DR: In this paper, the authors identify the effects of monetary policy on credit risk-taking with an exhaustive credit register of loan applications and contracts, and find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default.
Abstract: We identify the effects of monetary policy on credit risk-taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality, and the volume of demand. We employ a two-stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time-varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default. A lower long-term interest rate and other relevant macroeconomic variables have no such effects.
965 citations
TL;DR: In this article, a DSGE model is used to estimate the role of redistribution and other financial shocks that affect leveraged sectors in the Great Recession. But the model assumes that banks hold little equity in excess of regulatory requirements and the losses require them to react immediately, either by recapitalizing or by deleveraging.
302 citations
TL;DR: In this article, the authors extend this criminological perspective to the context of the U.S. education system and identify indirect "collateral consequences" of mass imprisonment, and they apply it to the education system of the United States.
Abstract: An influential literature in criminology has identified indirect “collateral consequences” of mass imprisonment. We extend this criminological perspective to the context of the U.S. education syste...
180 citations
TL;DR: In this paper, the authors find that patent trading increases the annual rate of startup lending, particularly for startups with more re- deployable (less firm-specific) patent assets, and they also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending.
Abstract: The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more re- deployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory.
160 citations
TL;DR: An integrated trust model specifically for the online P2P lending context is developed to better understand the critical factors that drive lenders’ trust and provides valuable insights for both borrowers and intermediaries.
Abstract: Online peer-to-peer (P2P) lending is a new but essential financing method for small and micro enterprises that is conducted on the Internet and excludes the involvement of collateral and financial institutions. To tackle the inherent risk of this new financing method, trust must be cultivated. Based on trust theories, the present study develops an integrated trust model specifically for the online P2P lending context, to better understand the critical factors that drive lenders' trust. The model is empirically tested using surveyed data from 785 online lenders of PPDai, the first and largest online P2P platform in China. The results show that both trust in borrowers and trust in intermediaries are significant factors influencing lenders' lending intention. However, trust in borrowers is more critical, and not only directly nurtures lenders' lending intention more efficiently than trust in intermediaries, but also carries the impact of trust in intermediaries on lenders' lending intention. To develop lenders' trust, borrowers should provide high-quality information for their loan requests and intermediaries should provide high-quality services and sufficient security protection. The findings provide valuable insights for both borrowers and intermediaries.
135 citations
TL;DR: A brief glossary of readily understandable terms to denote the formation, adaptive growth, and maladaptive rarefaction of collateral circulation is provided and several newly discovered processes that occur in the collateral circulation are proposed.
Abstract: It is well known that the protective capacity of the collateral circulation falls short in many individuals with ischemic disease of the heart, brain, and lower extremities. In the past 15 years, opportunities created by molecular and genetic tools, together with disappointing outcomes in many angiogenic trials, have led to a significant increase in the number of studies that focus on: understanding the basic biology of the collateral circulation; identifying the mechanisms that limit the collateral circulation's capacity in many individuals; devising methods to measure collateral extent, which has been found to vary widely among individuals; and developing treatments to increase collateral blood flow in obstructive disease. Unfortunately, accompanying this increase in reports has been a proliferation of vague terms used to describe the disposition and behavior of this unique circulation, as well as the increasing misuse of well-ensconced ones by new (and old) students of collateral circulation. With this in mind, we provide a brief glossary of readily understandable terms to denote the formation, adaptive growth, and maladaptive rarefaction of collateral circulation. We also propose terminology for several newly discovered processes that occur in the collateral circulation. Finally, we include terms used to describe vessels that are sometimes confused with collaterals, as well as terms describing processes active in the general arterial-venous circulation when ischemic conditions engage the collateral circulation. We hope this brief review will help unify the terminology used in collateral research.
134 citations
TL;DR: In this article, the authors examine the business model of traditional commercial banks in the context of their coexistence with shadow banks and examine the differences between the two types of intermediaries.
134 citations
TL;DR: In this article, a dynamic macroeconomic model of financial intermediation in an environment where households demand liquid assets is proposed, and the model generates amplication via endogenous collateral runs, as well as ight to quality eects.
Abstract: We propose a dynamic macroeconomic model of nancial intermediation in an environment where households demand liquid assets. In contrast to the literature, intermediaries can issue equity without any friction. In normal times, intermediaries maximize liquidity creation by levering up the collateral value of their assets, a process we call shadow banking. A rise in uncertainty causes investors to demand liquidity in bad states. Intermediaries respond by simultaneously deleveraging and substituting toward safe liabilities; shadow banking eectively shuts down, prices fall and investment plummets. The model generates amplication via endogenous collateral runs, as well as ight to quality eects. The model’s macroeconomic eects are consistent with a slow economic recovery even when|and especially when|intermediary capital is high. We analyze the impact of several policy interventions in the areas of unconventional monetary policy and regulatory reform.
129 citations
TL;DR: In this article, the impact of new margin and clearing practices and regulations on the impact on CDS demand is analyzed using an extensive data set of bilateral exposures on credit default swap (CDS).
Abstract: We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the “velocity drag” associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.
128 citations
TL;DR: In this article, the authors studied the impact of introducing large monopolistic banks on macroeconomic outcomes and the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers' credit capacity to the value of their durable assets.
Abstract: This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers’ credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs’ leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks’ market power. Third, we find that amplification is stronger the more aggressive the central bank’s response to inflation, as measured by the inflation coefficient in the Taylor rule.
99 citations
Posted Content•
TL;DR: In this paper, the authors propose a framework to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household, and calibrate their metric of distress and estimate stress-test elasticities in response to an interest rate shock, an income shock and a house price shock.
Abstract: We propose a novel framework to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household. Using the data from the Household Finance and Consumption Survey and the country-level data on non-performing loans we calibrate our metric of distress and estimate stress-test elasticities in response to an interest rate shock, an income shock and a house price shock. We find that, albeit euro area households are relatively resilient as a whole, there are large discrepancies in the impact of macroeconomic shocks across countries. Furthermore, while losses given default as calculated using our framework are low, they are sensitive to house prices changes. Hence, any factors hindering the seizure of the collateral or lowering its value, such as inefficient legal systems, moratoria on foreclosures or bottlenecks in judicial procedures may significantly increase losses facing banks. Finally, we demonstrate that our framework could be used for macroprudential purposes, in particular for the calibration of country level loan-to-value ratio caps.
Posted Content•
TL;DR: In this article, a DSGE model is used to estimate the role of redistribution and other financial shocks that affect leveraged sectors during the Great Recession. But the model assumes that a small sector of the economy defaults on their loans, and the losses require them to react immediately, either by recapitalizing or by deleveraging.
Abstract: Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.
TL;DR: In this paper, the authors examined the impact of real estate prices on firm capital structure decisions and found that firms significantly change their debt structure in response to real estate value appreciation, and that a one standard deviation increase in predicted value of firm pledgeable collateral translates into a 3 percentage points increase in firm leverage ratio.
Abstract: This paper examines the impact of real estate prices on firm capital structure decisions. For a typical U.S. listed company, a one-standard-deviation increase in predicted value of firm pledgeable collateral translates into a 3 percentage points increase in firm leverage ratio. The identification strategy employs a triple interaction of MSA-level land supply elasticity, real estate prices, and a measure of a firm's real estate holdings as an exogenous source of variation in firm collateral values. Firms significantly change their debt structure in response to collateral value appreciation. The results indicate the importance of collateral values in mitigating potential informational imperfections.
TL;DR: In this article, the authors show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with Fisherian amplification produces a boom-bust cycle in debt, asset prices and consumption.
TL;DR: In this article, the determinants of collateral requirements for loans that are extended to small and medium-sized enterprises in less-developed countries were investigated and the strongest evidence emphasises the importance of borrower risk and loan cost in collateral determinants.
Abstract: This paper aims to investigate the determinants of collateral requirements for loans that are extended to small and medium-sized enterprises in less-developed countries Our primary data source consists of the results from firms in Eastern Europe and Central Asia from the Business Environment and Enterprise Performance Survey, which is compiled by the World Bank and the European Bank for Reconstruction and Development The results show that borrower-specific variables are more important than country-specific variables in determining collateral requirements on loan contracts The strongest evidence in our paper emphasises the importance of borrower risk and loan cost in collateral determinants
TL;DR: In this paper, the authors examined the relationship between shareholder litigation and the price and nonprice terms of bank loan contracts and found that after filing a lawsuit, defendants pay higher loan spreads and up-front charges, experience more financial covenants, and are more likely to have a collateral requirement.
Abstract: We examine shareholder litigation and the price and nonprice terms of bank loan contracts. After filing a lawsuit, defendant firms pay higher loan spreads and up-front charges, experience more financial covenants, and are more likely to have a collateral requirement. These findings are consistent with reputational losses associated with shareholder litigation. The magnitude of a firm’s lost market value when the lawsuit is filed is positively related to the increase in the firm’s future borrowing costs. We investigate whether the lawsuit allegations and its merit affect future bank loan terms. Our results do not appear to be affected by self-selection.
TL;DR: The authors argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure, and the efficiency of market outcomes.
Abstract: Much of the lending in modern economies is secured by some form of collateral: residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities, and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure, and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the subprime mortgage market.
TL;DR: The authors studied the risk-taking channel of monetary policy in Bolivia and found that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance.
Abstract: We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the US. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking we assess collateral coverage, expected returns and risk premia of the newly-granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.
TL;DR: In this article, the effects of monetary policy and financial innovation on economic growth and asset-pricing theory are analyzed. And the authors show that inflation can raise output, employment and investment, plus improve housing and stock markets.
Abstract: When limited commitment hinders unsecured credit, assets help by serving as collateral We study models where assets differ in pledgability - the extent to which they can be used to secure loans - and hence liquidity Although many previous analyses of imperfect credit focus on producers, we emphasize consumers Household debt limits are determined by the cost households incur when assets are seized in the event of default The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation We show that inflation can raise output, employment and investment, plus improve housing and stock markets For the baseline calibration, optimal inflation is positive Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare
TL;DR: In this paper, a model of money, credit, and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to an upward-sloping nominal yield curve.
TL;DR: In this article, the authors exploit a 2004 credit reform in Brazil that simplified the sale of repossessed cars used as collateral for auto loans and show that the reform expanded credit to riskier, self-employed borrowers who purchased newer, more expensive cars.
Abstract: We exploit a 2004 credit reform in Brazil that simplified the sale of repossessed cars used as collateral for auto loans. We show that the reform expanded credit to riskier, self-employed borrowers who purchased newer, more expensive cars. The legal change has led to larger loans with lower spreads and longer maturities. Although the credit reform improved riskier borrowers' access to credit, it also led to increased incidences of delinquency and default. Our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit.
Journal Article•
TL;DR: In this article, the authors identify and examine the issues of risk management in Islamic banks and propose solutions and effective risk management implementation to re-Aect the unique features of the Islamic financial services and products.
Abstract: IntroductionIslamic banks have experienced increasing proliferation around the globe, particularly, where countries including Sudan, Pakistan and Iran have fully implemented Shari'ah laws. In other Muslim countries like Kuwait, Egypt, Jordan, the UAE, Saudi Arabia, Malaysia, Brunei and Indonesia, both Islamic and standard banks co-exist and are run next to each other. In this regard, Islamic banks and standard banks operations are conducted in two different ways - first, to open an Islamic financial department in standard banks and second, to build separate standard bank branches, operating under Islamic Shari'ah. Such branches are different from the normal standard banking in that they depend on Shari'ah as their financial services references. The Islamic financial services industry is comprised of several institutions that range from business and venture banks, mutual insurance Anns, and investment Anns. Nevertheless, the basis of financial services and maintenance in majority of Islamic countries is formed by banks indicating the significance of risk management in Islamic banks. Several issues to end requires to be addressed, with the most challenging of which is the various methods used by Islamic banks to offer funds that could incur risks. In tliis regard, the permitted Islamic funding methods provided by these banks are the combination of the profit loss sharing methods as well as the non-profit loss sharing method. Both methods incur various issues, such as risk measurement, collateral sufficiency, and income recognition. These issues call for solutions and effective risk management implementation to reAect the unique features of the Islamic financial services and products. The present research identifies and examines these issues.Islamic Banks and their Surrounding RisksThe distinct qualities and methods employed in Islamic financing are accompanied by unique risks that require consideration to assist in developing suitable risk management. For instance, the profit loss sharing (PLS) modes call for special consideration as they are characterized by a great level of risk. This is especially true when PLS models shift the immediate risk of Islamic banks to investment depositors, in which case they raise the amount of risk of the banks' assets. In other words, PLS modes make Islamic banks susceptible to risks often shouldered by the equity investors as opposed to debt owners for the following reason, among others;1. PLS modes management is more complicated compared to traditional financing and the former calls for various transactions that are not easily done through traditional banks; e.g. determining profit/loss sharing ratios on different investment developments within multiple sectors of the economy, and the continuous auditing of financed projects in order to ensure effective governance.There are also different transactions conducted by Islamic banks like those that provide funds via the PLS and non-PLS modes.Granting funds through the PLS service mode, particularly in the case of Mudarabah contracts and transactions, confirms no default on the side of the entrepreneurs until the PLS contract expires. In this case, the parties share the low profit or loss based on the predetermined PLS ratios.In addition to the above, Islamic banks are not legally authorized to advice the entrepreneur administering the business via Mudarabah contracts, and thus, the entrepreneur has the autonomy to run the business based on his preferences and personal decisions. Banks only have the right to share profit or loss from the manager based on the ratio agreed upon in the contract. On the other hand, in direct investment contracts or Musharakah transactions, the bank has a more ample opportunity to control the business because the partners in the contracts are authorized to use their voting rights if they want changes made. Thus, in Islamic finance, the PLS modes cannot be considered as whole and inclusive of guarantees in order to minimize the level of risk and while some operational risks are explained above, the following may be the reasons behind them;a. …
TL;DR: In this paper, a dataset from a large bank containing timely assessments of collateral values, in conjunction with a legal reform that exogenously reduced those values, was used to show that the bank responded to this change by increasing interest rates, tightening credit limits and reducing the intensity of its monitoring of borrowers and collateral, spurring delinquency of borrowers on outstanding claims.
Abstract: We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique dataset from a large bank containing timely assessments of collateral values, in conjunction with a legal reform that exogenously reduced those values, we find that the bank responded to this change by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring delinquency of borrowers on outstanding claims. We so explain why banks are senior lenders and quantify the value of claimant priority.
Posted Content•
TL;DR: In this paper, exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation was studied, and the main result is that devaluing the exchange rate during a financial crisis has a positive impact on welfare, because the stimulus provided by a devaluation sustains asset prices, the value of collateral and access to the international credit markets.
Abstract: This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stop-prone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that devaluing the exchange rate during a financial crisis has a positive impact on welfare, because the stimulus provided by a devaluation sustains asset prices, the value of collateral, and access to the international credit markets.
TL;DR: This article developed a model with adverse selection and reputation that is consistent with such fluctuations in the volume of new issuances in secondary loan markets, and described policies that can implement efficient outcomes unless collateral values are low and originators reputational levels are low.
Abstract: The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators reputational levels are low. We describe policies that can implement efficient outcomes.
TL;DR: In this paper, the authors analyze characteristics of patents to disentangle whether it is the technology underlying a patent or the patent's exclusion right per se that matters for collateralization.
Posted Content•
01 Jan 2014
TL;DR: In this paper, the authors study aggregate contraction in an economy where firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral.
Abstract: We study aggregate ‡uctuations in an economy where …rms have persistent dierences in total factor productivities, capital and debt or …nancial assets. Investment is funded by retained earn- ings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger …rms, those with more collateral, have higher levels of investment than smaller …rms with less collateral. Since large and small …rms draw from the same productivity distribution, this implies an insu¢ cient allocation of capital in small …rms and thus reduces aggregate total factor productivity, capital and GDP. We consider business cycles driven by shocks to aggregate total factor productivity and by credit shocks. The latter are …nancial shocks that worsen …rms'cash on hand and reduce the fraction of collateral lenders can seize in the event of default. In equilibrium, our nonlinear loan rate sched- ules drive countercyclical default risk and exit, alongside procyclical entry. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of …rms and a deterioration in the allocation of capital that ampli…es the eect of the shock. The recession following a negative credit shock is qualitatively dierent from that following a produc- tivity shock, and more closely resembles the 2007 U.S. recession in several respects. A rise in default and a substantial fall in entry yield a large decline in the number of …rms. Measured TFP falls for several periods, as do employment, investment and GDP, and the ultimate declines in investment and employment are large relative to that in TFP. Moreover, the recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of …rms.
TL;DR: The authors analyzed a model with disagreement, where securities and collateral requirements are endogenous and showed that the security that isolates the variable with disagreement is "optimal" in the sense that alternative securities cannot generate any trading.
Abstract: Collateral frictions have a profound effect on our economic landscape, ranging from the design of financial securities, laws, institutions, to various rules and regulations. We analyze a model with disagreement, where securities and collateral requirements are endogenous. It shows that the security that isolates the variable with disagreement is “optimal” in the sense that alternative securities cannot generate any trading. In an economy with N states, investors may introduce more than N securities, and markets are still incomplete. The model has several novel predictions on the behavior of basis — the spread between the prices of an asset and its replicating portfolio.
TL;DR: In this paper, the authors investigated pricing problems of both infinite- and finite-maturity stock loans under a hyperexponential jump diffusion model, and provided analytical approximations to both stock loan prices and deltas by solving an ordinary integro-differential equation as well as a complicated nonlinear system.
TL;DR: In this paper, the role of micro-finance institutions (MFIs) in helping to bridge the financing gap faced by SMEs in Ghana is explored. And the authors made some recommendations on how the SME financing gap can further be bridged by MFIs and other stakeholders which included provision of support services to SMEs by MFI such as training services in credit management and the need for MFI to improve service delivery such as faster loan approval times.
Abstract: Financing Small and Medium-Scale Enterprises (SMEs) to achieve the desirable growth and expansion has been topical for governments, policymakers, non-governmental organizations (NGOs), financial and non-financial institutions. The recent upsurge in the interest of finding ways of bridging the financing gap faced by SMEs by these stakeholders have been necessitated by the enormous contributions of SMEs to the economic development and growth of countries in areas of job creation, GDP and entrepreneurial skill development. This research therefore sought to access the role of one of the stakeholders, microfinance institutions (MFIs) in helping to bridge the financing gap faced by SMEs in Ghana. The research established that there was indeed the existence of SME financing gap in the country as most of them were denied access to credit by commercial banks and other financial institutions. The research revealed that the operations of microfinance institutions (MFIs) are having positive impact on SMEs. The study also revealed some risk mitigation tools used by MFIs in granting loans to SMEs which included provision of collateral security in the form of land or any other valuable asset, business records, credit history among others. The research concluded with some recommendations on how the SME financing gap can further be bridged by MFIs and other stakeholders which included provision of support services to SMEs by MFIs such as training services in credit management as well as the need for MFIs to improve service delivery such as faster loan approval times.