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. These results imply that MSMEs are not 'locked-in' to their main bank and long-term relationships between banks and MSMEs barely exist. The authors flag the need to break down information barriers between commercial banks and MSMEs and encourage ‘relationship lending’ to avoid upward mispricing of interest rates offered to these firms.
Mphuka, C.; Simumba, J.; Banda, B. PEDL Research Paper. Borrower Switching Behavior, Market Dominance and BankCompetition of Micro, Small and Medium Enterprises Credit inZambia. Centre for Economic Policy Research (CEPR), (2013) 19 pp.