A Conceptual Framework for Bounded Rationality in Bank Officers’ Credit Decision for SME Lending in Malaysia

Based on the Bounded Rational Theory, ideally, bank credit officers would be influenced by both rational (fundamental factors) and irrational (behavioural factors) in their credit assessment and decision making process. Emphasizing on the irrational decision making perspective, behavioural factors distort the credit decision making process in the banking industry. Despite such evidence, the psychology perspectives in bank lending practice has been given little attention in research and neglected in practice and policy perspectives. This conceptual research investigated the role of irrationality in bank lending decision making. The research design involved three stages. The research started with conceptualization of the bounded rational credit decision framework. This was designed based on review of three theories and related empirical evidence. In the second stage, constructs and their measurement items were sourced from prior work. Thereafter, a questionnaire was developed. In the third stage, the validity of the questionnaire was tested using expert validation, pre-test and pilot-test involving 30 credit officers working in business banking division of a Malaysian bank. Findings from the pilot study confirmed the validity of the questionnaire as an instrument that can be used for future empirical test. This bounded rational credit decision framework can guide further empirical analysis on the role of behavioural factors in lending decision making. The framework provides new insights that are valuable in enhancing the SMEs lending theory, practice, and policy. Keywords: behavioural finance, bounded rational theory, business banking, credit decision, small and medium-sized enterprises (SMEs)