Mind Game in Finance: Game Theory Insights into SME Financing Strategies in Nigeria.

Abstract

Small and medium-sized enterprises (SMEs) play a crucial role in the economy despite their relatively modest scale and often weak governance structures. The challenges faced by SMEs, particularly in terms of financing, have hindered their development and resulted in instances of mis-investment and capital loss. Central to these challenges is the issue of information asymmetry, which creates hurdles for SMEs in securing funds from financial institutions. To address this gap, the application of game theory analysis becomes a necessity. The theories of information asymmetry and pecking order are employed to elucidate the dynamics of adverse selection and moral hazard within the bank-firm relationship. These dynamics contribute to credit rationing scenarios and overall market inefficiency. The study employed game theory to analyze the bank-firm relationship, considering both complete and incomplete information situations. Furthermore, the analysis extends to credit availability for SMEs, with a focus on mitigating defaults and losses through the identification of penalty mechanisms. From the findings, it becomes imperative that strategies to alleviate SME financing difficulties encompass the mitigation of information asymmetry, establishment of appropriate incentives, collaborative efforts with government agencies and cooperative societies to bolster confidence, reinforcement of small and business enterprise databanks, and the promotion of information sharing among lenders and SMEs.