Determinants of SME Bank Lending Decisions: An Integrated Demand–Supply PLS-SEM Analysis from Sri Lanka

Access to formal finance remains one of the most persistent structural constraints faced by small and medium enterprises (SMEs) in developing economies. Despite sustained policy emphasis on financial inclusion, significant gaps remain between the demand for and supply of bank credit, largely due to information asymmetry, institutional rigidities and risk-averse lending behaviour. This study develops and empirically tests an integrated analytical framework that captures both demand-side and supply-side determinants of bank lending decisions using partial least squares structural equation modelling (PLS-SEM). Primary data were collected from 150 respondents, comprising SME owners and bank managers in Sri Lanka’s Western Province. The model incorporates key latent constructs, including financial transparency, collateral availability and creditworthiness (demand-side), alongside risk perception, lending policies and the regulatory environment (supply-side). The measurement and structural model assessments demonstrate strong reliability, convergent and discriminant validity, and substantial predictive power. The findings reveal that financial transparency and creditworthiness significantly enhance access to bank finance, while risk perception emerges as the most critical constraint from the supply side. Collateral remains important but is gradually being complemented by information-based lending mechanisms. Furthermore, institutional lending policies and regulatory frameworks play a facilitating role in shaping lending outcomes. This study contributes to the literature by offering a novel, integrated PLS-SEM framework that captures the systemic nature of SME lending decisions within a developing country context. It also provides policy-relevant insights for improving financial inclusion through institutional reforms, enhanced credit information systems and capacity-building initiatives. The findings disclose a structural transition in Sri Lanka’s banking practices from collateral-based lending towards information-driven and risk-sensitive lending technologies.