Construction loans and industry development: the case of Hong Kong

Abstract

Building contractors are generally small private firms. Bank loans are their major, if not only, source of external finance. However, building and construction loans represent a mere minuscule portion of all bank loans in Hong Kong, suggesting that contractors may have been neglected by banks. With the case of Hong Kong, this study examines the lack of supply and demand of construction finance, and the implications for industry competition and innovation. Contractors’ perceptions were solicited through a questionnaire survey. Key issues identified were further explored in subsequent interviews. The results were then triangulated with secondary data. It is found that although contractors do not usually have enough assets to pledge as collateral, they generally do not need to borrow that much. The provision of interim payments has enabled them to work with small capital outlay. However, the interim payment mechanism has induced a low barrier to entry, which has helped perpetuate the vicious circle of labour intensiveness of building construction, exploitation of labour‐only subcontracting, proliferation of small subcontractors and intense rivalry between firms. The findings conclude that contractors’ limited access to finance generally and bank loans in particular has posed a major barrier to innovation and hence industry development.

Keywords:

• Construction companies
• finance
• industry development
• Hong Kong

Acknowledgements

The work described in this paper was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. Poly U 5144/06E). We are grateful to Mr Lawrence K.L. Leung for his research assistance, to our respondents who filled in our questionnaires, to the eight contractors who generously granted us the interviews and to the four anonymous referees for their comments. All views and the remaining faults in this paper are the responsibility of the authors.