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Economic diversification is a key policy goal for the Government of Botswana. SMEs offer a feasible option towards the actualisation of this goal. The expansion of SMEs in Botswana however is constrained by lack of access to bank credit. This constrained access to credit is argued in the literature to be due to the credit rationing behaviour of banks emanating from asymmetric information in credit markets. Constrained access to credit stifles the growth potential of this vibrant sector which is increasingly generating employment opportunities especially for women (CSO, 2007). This study therefore investigated the factors that influence the credit rationing behaviour of banks towards SMEs using 2007 Informal Sector Survey data collected by Central Statistics Office and supplemented by our own survey of SMEs from the major cities/towns in Botswana on the demand side, and key informant discussions with the banks on the supply side. Heckman Probit Model with sample selection was used to estimate the determinants of the probability of SMEs being credit rationed by banks. The study findings suggest that the experience of SMEs reduces their probability of being credit rationed by banks. From the bank perspective the experience of SMEs is determined from their ability to keep proper financial statements, the performance of their bank accounts with the banks, and their ability to make profits. This calls for capacity building of SMEs in areas of business management (including financial record keeping) if they are to be rated as credit worthy borrowers by the banks. From the SMEs perspective, there is need for banks to improve their efficiency in terms of reduction of loan processing time and cost of borrowing (i.e. interest rate). This will improve access to bank credit by the SMEs and promote their growth thereby stimulating economic diversification, employment creation opportunities, increase household incomes, and contributing to poverty reduction in line with Botswana’s Vision 2016.
Key Words: Economic Diversification, Credit Rationing, Botswana