Role of bank finance to the development of SMEs in Northamptonshire: Lessons for African economies

According to Cook (2000) interest in the role of Small and Medium Sized Enterprises (SMEs) in the development process continues to be in the forefront of policy debates in both the developing and developed economies for which the United Kingdom is no exception. The advantages claimed for SMEs are numerous.

Among others, it includes: (i) Encouragement of entrepreneurship, (ii) Innovation of ideas, (iii) Utilization of intensive Labour technologies, which may have an immediate impact on employment generation because they can be rapidly established and put into operation.

(iv) SMEs development can encourage the process of both inter and intra regional decentralization and become a countervailing force against the power of large enterprises. (v) Thus, the development of SMEs can accelerate the achievement of wider socioeconomic objectives, including but not limited to poverty alleviation, but also improvement in entrepreneurial capacities, emancipation of the poor and promoting real change in the general well being of the under class.

Staley and Morse (1965) identify a developmental approach to SMEs promotion which has its objective as the creation of economically viable enterprises which can stand on their own feet without perpetual subsidies and can make a positive contribution to the growth of real income and better living standards. This approach emphasizes the importance of the efficiencies of SMEs.

In this regard, Small producers must be encouraged to adopt new methods, move into new lines of production and in the long run, where feasible, they should be encouraged to become medium or even large scale producers or enterprises.

Consequently, Mazumdar (1997) argues that, more recently, concerns associated with the growth and efficiencies of smaller enterprises have also become more prominent. Adding his voice to this line of thinking, Allen (1992) observed that, using the case of Northamptonshire, he argued that, small enterprises are more efficient because they have adopted a flexible specialization approach which makes it appreciably easy for banks to offer them finance and associated advisory services.

Admittedly, Schmitz (1989), Pederson (1994) indicates that, there has been growing interest in whether these specialization approaches have or could be replicated in developing countries. It is therefore thought that, if the behaviour of SMEs in developing countries could be changed then, finance, which is believed to be a very crucial factor in SMEs development, could easily be gained from banks.

In spite of this state of affairs, Allen (1992) believes that, enough credit has been made available to SMEs. Levy (1993), on the other hand, indicates that, there has been limited access to financial resources available to smaller enterprises as compared to larger ones which has a consequent effect on their growth and development. Saito and Villanueve (1981) also argue that, typically smaller enterprises face higher transaction cost than larger enterprises in obtaining credit.

More importantly, poor management and inefficient accounting practices have hampered the ability of small enterprises to raise finance as has been revealed from the preliminary study conducted in the county. Interestingly, Liedholm, Mac Pherson and Chuta (1994), also stressed that, information asymmetries associated with lending to small borrowers has shown that, large number of small enterprises fail because of non financial reasons.

Thus, the purpose of this article is to examine the role of Bank finance in the development of SMEs in the county and to ascertain whether it is the single most important factor in determining the development of SMEs in the Northamptonshire and what lessons could be learned by SMEs in developing countries like Ghana: although over the years the industry is rapidly transforming.

Literature Review:

According to the European Commission Staff Working Papers (2001) on "Enterprises access to Finance", over 90% of European Enterprises are Small and Medium Sized Enterprises (SMEs) and are responsible for two thirds of total employment. The paper indicates that, a competitive financing environment for all companies is a key element in promoting an entrepreneurial economy and strengthening growth. However, it fails to state why it has taken such a long time for the Commission to indicate clearly to its member nations that, SMEs development is a priority and strategic area of concentration for it's work decades ago.

Nevertheless, the report did stress that, within each member state SMEs should have access to financial instruments that match their needs at each stage of development. This has perhaps led to the rapid response to SMEs financial needs in the past few years by European financial markets. However, there are areas where market development has been slow. There are also considerable difference between member states in the structure of markets and availability of financial products.

According to Aryeetey et al (1994), problems associated with access to finance can arise either at the supply or the demand side. On the supply side, problems arise when appropriate sources of finance are not available at all, or they are not available on time and that conditions and terms are unsuitable for SMEs. On the demand side, SMEs fail when they do not make use of financing opportunities that exists, because of the lack of collateral security or poor presentation of their case for funding.

In order to overcome the hurdles in accessing finance both sides or challenges need to be addressed. But Aryeetey fails to mention that, SMEs must endeavour to draw strategic plans for financing their activities in order to avoid cash flow problems.

The Third Round Table of Bankers and SMEs (2000) final report agrees with Aryeetey's view and indicate that, despite some remarkable achievement in recent past by most interested parties in SMEs financing ( whose overall objective is to optimize the mutual relationship between banks and SMEs), the situation remains difficult for many companies seeking bank credit particularly in some identified sub sector where banks make more than average losses and in this current pandemic era, COVID -19 effects are lingering over many economic activities across many nations around the globe.

Not to mention, the current effects of the Russia Ukraine war causing higher oil/gas prices and hyper inflation which affects the bottom line operations of many SMEs, and large corporations around the globe.

Nonetheless, Godwin (1993) also contributing on the subject of financing of SMEs gives a number of reasons for the poor relations between banks and SMEs. He argues that, the objective of banks is to manage risk on loans provided in order to avoid losses while for SMEs their overarching objective is getting funding without constraints to allow for flexibility in all business activities.

Consequently, Chittenden et al (1995) holds the view that, banks give high priority to shareholders member value by focusing on the Bank's strategic objective on raising productivity, efficiency and profitability while on the contrary Bannock et al (1988) stresses that, SMEs objective is to acquire the necessary funding and support to start up business, develop, prosper, make a profit and provide a satisfactory return to owners and employees.

Interestingly, Kirchoff (1995) indicates that, Banks segregate the organization into autonomous business units and channels in order to maximize productivity, efficiency and individual profit contributions whiles SMEs require single sources of customized and comprehensive packages of products and services to improve business performance and have maximum access to loans and services.

Igawa and Kanatas (1990), agree with Kirchoff but however stresses that, banks could rather reorganize the branch network and reduce low margin services to cut costs and improve short term profitability. Unfortunately, this aggressive nature and profit consciousness of Banks has become the overarching characteristics of Banks in Northamptonshire and the UK.

In spite of this distinct differences between Banks and SMEs, the Third Round Table of Bankers and SMEs (2000) report called for a close cooperation among the two parties. This is because both depend upon each other. Thus, Ballantyne (2001) from the Institute of Directors indicate that, more than 80% of the Small business market is held by the four big banks ( Barclays, Lloyds TSB, Nat West/Royal Bank of Scotland and HSBC) in Northamptonshire and the UK.

Bikerstaff (1999) gives a global dimension to the relation between Banks and SMEs and stresses that, International mergers, the proposal of new stricter base capital adequacy regulation, cost issues, together with competitive pressures are forcing banks to concentrate on core business profit generators.

As a consequence, this diminishes their role as Integrated Universal Banks willing to accept lower returns on vulnerable groups of SMEs. This inevitably affects relationships with SMEs who need a wide variety of products and services, which may be reduced or become unavailable from profit driven service providers in the future.

The challenge for banks as stressed by Allen (1992) are centered around the banks business focus, critical marketing for clients, management skills, business complexity, customer access, system control, flexibility, branding, technology development and management, client information and aversion to change and risk.

Thus the effects of these requirements on SMEs as stressed by Binks (1991) will be that, Banks will be required by their customers to be very simple, reliable, fair in processing of documents for loans, to be accurate on interest on loans, quick to respond to customer needs and being transparent. However, Binks failed to mention that, customer must also keep proper records of their operations to facilitate easy verification of their operations by banks.

That being said, Globen and Bezet (1983) hold a contrary view. They indicate that, the desire of customers for low priced quality products and services and low loan requirements and other barriers are too demanding and will leave banks to have no time for SMEs. But, Singhvi (2000) argues that, inspite of these numerous requirements or demands of customers from their banks, with proper planning of their operations and services, banks will be able to give more attention to the needs of their customers and SMEs.

On the supply side, Nolle (1994) believes that customers will have to be faithful in their dealings with banks thereby showing integrity, commitment to projects, amenable to change and a positive attitude towards success. This will leave banks more time to deal with the needs of SMEs.

Storey et al (1996) indicate that, due to historical ties or commercial imperatives, banks will retain most current businesses and SMEs support configurations. However, given the rapid pace of change, both banks and SMEs will certainly require considerably more help in the future from public and private support institutions if banks are to continue to offer the essential range of products and services to vulnerable SMEs.

Austin (1993) agrees with Singhvi (2000) that, the way forward for SMEs is to think strategically. So that, if their operations are planned and effectively managed even though banks may refuse to grant them loans, they will be able to manage their scarce resources until such times that conditions become favourable.

Consequently, Eccles et al (1992) agreeing with Argyris et al (1978) argued that "every young firm which use proactively formal strategic planning techniques will perform better than those who make use of reactive, visionary or intuitive methods". Thus any enterprise which wants to succeed must be prepared to face hard times and survive.

Although these arguments may seem laudable Eccles et al (1992) fail to recognize that, start up businesses are very vulnerable and that any lack of critically needed funds could bring down the whole enterprise.

This brings to light the point made by Diamond (1989) that credit or finance and managerial skills are crucial to the survival of any business or enterprise. Thus this culminates into defining the theoretical framework for the study which is based on the production possibility curve as stressed by Gillis et al (1992).

The theory hypothesis is that, there is a positive relation between input and output. It further explains that, the production possibility curve shifts outward over time with increasing availability of resources (inputs) which in this research work is bank finance.

That being said, the theory is unique in explaining why an enterprise has the potential to increase output when it has adequate finance. Storey (1995) believes that, the theory fails to incorporate other factors like government policy, competitive environment, wages, markets and general economic conditions as factors also influencing the enterprises level of output. Thus the theory's inability to explain these factors affecting production gives cause to investigate or verify if indeed bank finance is the single most crucial factor determining the development of SMEs.

In the East Midlands of the UK, research works by Woods and Caley (1993), indicate that, there is real financial equity gap inspite of government awareness of the fact that finance plays a vital role in the survival of SMEs or start ups. Nonetheless, Chittenden et al (1995) observed that, some efforts had been made by the government to provide finance for SMEs.

Thus, Venture Capital schemes were put in place in conjunction with the major banks (Barclays, Lloyds, TSB, Nat West/Royal Bank of Scotland) in the county and the UK at large to alleviate the situation. Hence the Chamber of Commerce, Business Link, the Institute of Small Business Affairs and private organizations are championing this campaign.

However, in comparison to developing countries like Ghana the promotion and development of SMEs has been slow, although some progress has been made over the years. According to Kilby (1995), although Africa has been the birthplace of important research on the concept of SMEs, SMEs have not been high on the development agenda of many African governments.

Along silimar lines, Kilby (1995), Helmsing and Kolstea (1993), stresses that, the current SMEs debate in Africa concentrate on the immediate development of problems and issues such as unemployment and structural adjustments impacts but pay insufficient attention to finance for SMEs or the role of SMEs in the industralization process of Africa.

Page (1978) observed that, not much research has been done on the impact of specific policies on SMEs. This is because policy makers have neglected this aspect of SMEs development.

On the contrary, Aryeetey (1991), believes that SMEs have failed to thrive owing to inappropriate credit policies. He shows that the share of SMEs in domestic credit markets in Ghana has been on a consistent decline between 1985 and 1990. For example, out of 100 Small Enterprises he studied, which had a current and savings account for sometime only one received the full amount of the credit applied for.

Forty-three percent of the SMEs had their application turned down for various reasons such as lack of collateral security, high risks, high default rates and higher administrative costs. However, the establishment of " mobile money " and other forms of money transfer and various ecommerce activities and the establishment of quasi banks/ private loan companies/ credit schemes may make access to credit more easy for SMEs.

Even though these problems are similar to those faced by SMEs in Northamptonshire and the UK, Small Businesses Service (2020) statistics in the UK revealed that over 80% of small businesses are able to acquire finance and bank loans for their startups or businesses.

This contrasting picture gives cause to worry for developing countries like Ghana. Thus, the study examines the role of Bank finance in the development of SMEs in Northamptonshire and lessons for developing countries.

It thus investigates the claim by Banks in Northamptonshire that "we develop a way of Banking for our customers that goes far beyond what you would expect. It begins with choice of relationship you want to have with us, so we can respond to your needs - finance and advisory services in the way that suits you, giving you the support you require. A major part to all your ideas and questions to help you achieve success in your terms".