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Firms Characteristics On The Level Of Financing

Financial intermediary is defines as a channeling funds between surplus and deficit agents, that allows the deposit from an individual or an organization to transform it into lending facilities ( Berger and Udell, 1995). Banks are a fundamental component of the financial system, and are also active players in financial markets. The considerable attention has been given to the relationship between banks and small organizations from varying sources over the years (Ibbotson and Moran, 2003). Transforming certain asset and liabilities into different assets and liabilities, bank representative are among the most frequently turned to support to SME’s as compare to large organizations (Berger and Udell, 1995). As the large organization has a strong privilege over the SME’s, factors include strong negotiating power, legal status, financial and market performance, years of existence and revenue. A large number of small firms are sufficiently dissatisfied with their bank relationship to have considered switching to an alternative bank (Perry and Coetzer, 2009).

Today, some researchers (Ibbotson and Moran, 2003, Berger and Udell 1995, Perry and Coetzer, 2009) went beyond this and suggested that the personal relationship was needed to make the bank more aware of their industry. Thus, various studies have shown that relationship lending results in lower interest rate, lower collateral requirements and increase availability of finance compared with the situation faced by businesses without a relationship history with their banks. (Perry and Coetzer, 2009).

Now, it’s a problem for the banks to get appropriate information from the banks regarding hard information such as (profits and revenues), so banks consider that through direct contact with the owner and local community, so, it is easy to get soft information through the good relationship (Uchida, F Udell and Yamori, 2008).

The purpose of this research is to focus on the effects of small and medium firm’s specific characters tics on bank financing decisions. This research might be helpful to understand the causes and the effects which leads the bank financing decisions and the level of financing, by determining the cause includes the lending to large firms or organization in order to get the higher return in terms of interest and to keep their debt safer as compare to SME’s (.Scott and Cox, E1984). Banks usually want to build up the long term relationship whereas the SME’s usually prefer short term debts. Collaterals of the large enterprises is meaningful for the banks and they have certain amount of trust because of that, the lending preferences is more towards the large as compare to SME’s (Berger and Udell, 1995). SME’s usually applies for cash financing instead of business financing.

This causes result in the effects which are highlighted in the financing decisions of the bank for the SME’s. the dissatisfaction effects the good will of the banks and increases the bargaining power of the SME’s because of the repeatedly dealings with different banks (Canovas and Salano,2006), offering different facilities resulted in the competitive environment for the SME’s ( Berger and Udell, 1995)

Six hypotheses were developed:

H1: Revenue generated by SME help to get the lending facilities easily.

H2: SME’s with the high level of the market performance builds the long term relationship.

H3: Good market image of SME’S affects the long term relationship.

H4: Credit limit provided by the bank to SME’s might enhance the growth of relationship.

H5: The nature of collateral mortgage by the SME’S might Effect on credit limit financing.

H6: Interest rate provided to SME’s based on the duration of relationship with bank.

SME’s financing has become a vital component in the development of an economy, therefore many banks and financial policy maker are attracted towards and paying attention to SME’s in the recent years.


Bank financing is an important tool that is most preferable by SME’s in order to give their businesses financial supports which lead them towards their business expansion as well, the development of economy. Due to effect of recession, banks limit their financing facilities and emboss certain characteristics which must be matched or fulfilled by the SME’s in order to get a financing facility. Among the most highlighted characteristics,

SME’s year of existence, market image, growth, financial performance, nature of business, legal status and management are really considerable by the bank’s to facilitate SME’s with the financing. Apart from these, relationship among SME’S and bank representatives is the most considerable in today’s business market.

Long term relationship between these two entities provide benefit in a way that it increases the effective communication flow of information about business and reduces the cost of bank credit. Different school of thought has proved that lending relationship have resulted in nominal interest rate, adequate collateral requirements and increases the availability of being facilitated in various business situation, for SME’s.from the perspective of banks, this particular characteristic (long term relationship) help to forecast the performance and proceed for the further future transactions. switching towards an a alternative is more common in SME’s because of low levels of administrative resources and high transition risks, in case of a dependency on a supplier of single financial service. Because the competition between suppliers influencing banks to hire new clients and support a switching process, increases the switching ability. This

is also influenced by the perception of the SME’s that frequently switching results in different level of services provided by different banks. Dissatisfaction is considered to be one of the important factors in the frequent switching towards alternative banks. (Perry and Coetzer, 2009).

According to different researches, it is found that the commercial banks are the primary financial source for SME’s, which leads the SME’s towards the state of satisfaction or complete satisfaction. Due to the high-quality business relationship both parties are benefited from each other. Retention in the profitability and loyalty of the customers, ultimately enhance the growth and stability of the banks. Banks should provide financial service to the SME’s at the difficult time, which would increases, the loyalty and add in its good will. Banks decision making are usually in the formal context as compare of SME’s, resulted in the conflict of objective between the two businesses and consequently make their relationship problematic, (Butler and Durkin, 1998).

Addition of an intermediary by the banks for SME’s is a tool which makes their relationship stronger and reduces the risk of uncertain future with the adequate retention of profitability, resulted in the enduring survival. Multiple interaction of intermediary with the clients enables the provider to get the effective information about the financial performance in the market over a period of time. This information will allow the lender to reach the decision efficiently about a credit application given by the firm. One of the criticism raise by the SME’s includes the hidden charges by the banks on their different service offering which has not been clearly defined by the bank resulted it creating their relationship weaker (Hanley and O’ Donohoe). Opaqueness of SME’s providing difficulty for the banks to measure the capacity and willingness of them for sure. Willingness to participate in a relationship is a final measure of relationship in banking participation in obviously a various faceted concept and in very important in sharing and communicating the flow of information. (Binks and Enneu, 1996). This opaqueness predominantly undermines lending from institution that wants to connect in the additional impersonal or arms-length financing and need hard, purpose, and transparent information to do so.

Relationship lending is not the only way out in the extension SME’s financing but there are always other transactional technologies that help the level of arms-length lending, increasingly applied for SME’s financing. (Torre, Martinez Peria and Schmukler, 2008).

Hanley and O’Donohoe, 2009 have noted that positive relationship between the lenders and scope in a business banks suggest that the choice of the firm is always for a specific bank for a relevant financial service.

The relationship between both the parties can be more enhanced because of the multiple interactions when banks provide the information about their products and in the future both can work on a contractual basis regarding the product (Van Cayseele and Degryse, 2000). Management is being highly focused on the relationship by increasing the rapid use of information technology (Bremner,2001, Payne and Ryals, 2001) Because of these successful applications there is believe that marketing relation with banks business cliental will result in increase in the loyalties of customer which will act as a customer retention strategy in order to provide additional banking channels for the clients is becoming more of a strategic necessity for banks.

( Pennings,1998, Yakhlef,2001) Opportunities and challenges results because of the increase in the use of remote delivery channels (Murphy and Berg, 1999, Jaywardhena and Foley, 2000, Dewan and Seidmann, 2001, Horsfield, 2000) for financial service institution it is a promise that to change the nature of the traditional delivery system. According to the different authors, online banking such as electronic forms of banking which are being introduced by banks increases the improvement of their efficiencies but also increasing the strength of relationship with customers.(Brandman and Keeler, 2000).

Online delivery channels creating an obstacle in between the actual contacts of two parties which results predictability to the completion of the transformation with customer relationship of the traditional banks. ( Barnes and Howlett, 1998). Offering of low impersonal but friendlier relation in order to give them the human touch, which is more evident in personal banking channel and banks are taking action to make remote banking more efficient. Traditional banks if want to retain a competitive edge stronger then its rivals, then even though there should not be a lack of personal contacts that is inborn in electronics form of banking(Furash,1999)

Relationship itself being affected by many other variables such as assessment, if financial performance of SME’s is strong.

Financial performance is a main characteristic that leads SME’s to get a financial service for the bank which also consist purpose of the loan, size of the loan and credit history (Thorsten Beck, Demirguc-Kunt and Martinez Peria, 2009).

Some of the inherent characteristics of SME’s creating an obstacle ahead towards financing facilities may include heterogeneity in their activities, unavailability in formality and unreliability of financial statements and ownership’s low managerial capacity and their family business nature, complicate their assessment of worthiness of their credit and ultimately increases the cost of transaction.( Stephanou and Rodriguez, 2008). This is becoming a strategic necessity for banks to provide additional banking channel and adopt new technology for a customer (Ibbotson and Moran, 2003).

A financial statement is a tool and a formal record of the financial activities about any firm, organization, person, or other entity through which any organization, person, or other entity can be evaluated about the performance and the financial stability of a firm in the market. The SMEs are also taking in to consideration by the banks on the bases of financial statements in order to get financial services. Financial statement lending occupies underwriting loans which are based on the strong financial position of the firm and banks consider financial statement for the purpose of loans. This technology consist two requirements. Firstly, the SMEs should have a financial statement which can give proper information regarding the financial position of the firm (e.g, statements should be

audited and prepared by the accounting firms which have reputation according to the accounting standards which are commonly accepted such as GAAP).

Secondly, borrower or SMEs should have proper information regarding the financial position as it is reflecting through the ratios being calculated by the SMEs in the financial statements. There are the elements such as, collateral, covenants and/or personal guarantees and the financial statements reflect these different contracting elements as well the loan contract which has begun. On the other hand the lender will examine the predictable cash flows of the SMEs as the major source of reimbursement under the lending on the bases of financial statements. For the firms which are reasonably transparent in information, financial statement lending held in reserve not like all of the additional technologies. There is a unique advantage for those firms or SMEs, because of the financial statement lending, due to the appropriate information given in the financial statements which deals with the information trouble in a very low cost way (Berger and Udel, 2004,Stein 2002). According to the (Berger & Udel) financial statement lending supporting and examining based on hard information, it could be resourcefully presented by superior and more multifaceted financial institutions without incurring the organizational diseconomies talked about in the literature (i.e., discussed in Stein 2002).

The most important thing is the lending infra structure because the effectiveness of the financial statement lending depends on it. Exclusively, strong information environment is the base of its existence. Mainly, with respect to accounting standards and reliable

auditors. Offering a considerable amount of financial statement lending it seems probable that it’s not sufficient for the financial institutions in the economies which are developed.The most commonly used technology is financial statement lending in order to gage out the financial position of the SMEs. Accounts receivable, equipment and inventory is connected with collateralization, here an example, by way of financial statement lending where the collateral is being used as a secondary starting place of reimbursement. Transaction based lending technologies are mainly based on quantitative information which helps in analyzing the information regarding financial performance. The things which are included in the hard information are calculated financial ratios from the financial statements which are certified and audited and the credit scores are being taken from the history of the payments by the SMEs to gage out the financial performance of the small business in the market (Berger and Udel, 2004).

Banks which are interested in getting hard information or quantitative information may not be interested in relationship lending, because the information such as financial statements would make the SMEs transparent in front of the banks which will make a bank underwrite loans or take decision easily after finding out the financial performance of the SMEs (Udell and Berger, 2003, Uchida, Wako and Watanabe, 2006)

There is a suggestion for SMEs which provides hard information such as audited financial statement so they should choose larger banks for financial services because these statements are based on financial statements and it is a comparative advantage for them as well (Watanabe, F. Udell and Uchida, 2006). Hard information regarding financial statement should be audited by the third party which will result in verified statements about SMEs financial current performance and future performance, it would also help the banks to make relationship better and to increase lending facilities for the SMEs (Watanabe, F. Udell and Uchida, 2006).

A technique which are commonly used by many banks to decide that whether to give loan or not, it helps in decision making of the banks, it is an unbiased mode to decide who should receive credit. There are scores and weights which are related with the personal credit features, in which there are, income, debt and time which SMEs have spent in current transactions and gage out the financial performance of the firm (Berger and Scott Frame, 2005).

A lending technology which is being used by many banks consists some steps in which there is analyzing the data of the SMEs regarding the firm’s owner then compiling it with the data which is relevant regarding the firm and statistical methods to forecast the credit performance of the SME in the future. In the consumer credit markets (e.g., credit cards and mortgages ) the credit scores are used widely which results in low cost and it helps the SMEs for the credit availability by the banks after analyzing the data to find out financial performance. The performance of the SMEs is determined by the banks and the deviation in the performance of small business credits. According to this research a model used SBCS were made by gathering one sample of entirely seasoned loans then separating these in to “bads” and “goods” after analyzing the credit period such as delinquency and failure to pay or default. After this dual result was then statistically correlated to a numeral attributes regarding the owner and the business of that owner which are alleged to forecast performance of the loan. Through the principle proprietor, this includes credit bureau information on the bases of some variables such as net worth, prior delinquencies, income, available credit and prior bankruptcy. In the statistical model the same information regarding the SMEs was also used such as some financial ratios (leverage and profitability) in order to gage the financial performance of the SMEs. Hard information based lending procedures are keep on improving more than lending on the bases of relationship because of the technological enhancement which is favorable for the large banks over small banks and varies moderately over time (Berger and Scott Frame, 2005).

The literature recommends that profitability and viability will remain with the banks in its niche in the upcoming future and SMEs will also be stable (Berger and Scott Frame, 2005)(Udell ,DeYoung and Hunter 2004).

The decision of providing loans depends on the accuracy of the information regarding the profits and losses which are being forecasted.Banks are attracted more towards the SMEs to see the profitability of the of the SME’s, the most important thing which attracts the bank to SMEs is the profitability or financial performance. In developed countries there are eighty-one percent banks and in the developing countries there are seventy two percent of the banks point out that the reason for their involvement with the SME’s is the good financial performance and most of the banks are agreed with the factor that is profitability and involvement because of profitability with SME’s. In many countries the perception of the bank is to serve the SMEs as a profitable entity and approximately every bank have SME customers. Because of the intense competition between the large corporate banks are focusing more on SMEs as adequate profit generators (Martinez Peria, Thorsten Beck and Demirguc-Kunt ).

Different researches give support that the major financial challenges faced by SME’s is the result of their growth, which need to get a cautious attention by the management and financial reporters, if the SME’s wants to successfully grow and survive in the competitive market. There is a need for updated and relevant financial statement to monitor financial performance and position, by the SME’s to get a clear idea of their achievement. Regular forecasted financial statement is needed to successfully plan the business growth. It is ensure that a more sophisticated financial reporting system is necessary for effective use of SME’s economic resources in order to achieve a desired goal. The skills of financial analysis in particular are needed for the expected growth of the SME’s which allow the reading of financial statement. (McMahon, 1999).

Expansion rates of employee are measured by high growth firms which ultimately increase the economic growth. In the general population of firm, SME’s exhibit higher job creation rates as compare to the large one. High growth SME’s faces many difficulties including obtaining financing from different banks, to expand themselves in the market, in order to calculate the risk of alliances, to get the loyal partner and consultant, in hiring of an efficient employee and in development of the existing one.

Some of the effective majors have been taken by the government in order to help SME’s in cooping out with such difficulties. Such a program includes simplifying the policies and giving responsibilities of coordinating among local authority and monitoring on the periodic basis

Assistance, staff training and recruitment along with the innovation and financing, are the most common government scheme benefit the SME’s. Direct support is also being provided by the framework of small network of firm and fiscal incentives

Studies prove that there is no other alternative of achieving high growth but others allow the development of a typology of highly growth firms. Trajectory pattern shows that growth evolve in different stages. Skill network of high growth SME’s not only serve the large multinational corporation but also increases in the competitive globalised economy of traditional SME’s.

In Organization for economic co-operation and development (OECD) countries includes the characters tics of structural unemployeement and weak unemployment growth. Condition of the economy in micro, the function of lab our and the product market and the technological change effect on the globalization include in the situation have been investigated by the OECD.

Unemployment proves the unacceptability and incapacity of the economy towards the change. Nature of institution (SME’s) structural policies, laws and regulations and the social culture effecting adaptability of the economy (Philippe Mustar, 1998). Intervening four variables influencing the growth of the SME’s are owner’s development in micro-enterprises, motivation towards the growth, growth management expert, and demand and resource access. In SME’s, beyond the micro-enterprise phase required the entire intervening variable to be positive in influencing the growth. Growth and development of the SME’s prove to be an interactive adaptation to take decision in crucial step and molded the small enterprise to adapt the change in emerging situations. The timely and modified support is needed by micro enterprises instead of the supply side policies by the government which does not met the criterion needed by them and result to be wasted. Owner managed centered support is appreciated rather than adviser centered Parren, 1996)

Small enterprises competencies and a well being is a core indicator of growth. Many small enterprises are run among the families with a low growth rate tend to be in the stagnant position and always being in aloe market , having the employees of limited qualification proves to a major barrier in their growth as compare to the large enterprises. (Pechlaner, Raich, Zaheer and Peters,2004) . The preferences of small enterprises for financing facilities vary from one industry to another. As small enterprises are being deal according to the frame of their scope , the growth proved to be the need for the external finance. Direct relationship of industry export intensity and the growth prospective of small enterprises resulted that higher the export intensity of an industry the greater its growth prospects are.

(Fratel,1995) proves that the export intensity seems to be realistic in two ways , providing measures of growth potential which is tend to be perceived more by all firms and large and small involvement in an industry and the other is small size of enterprises itself mean that significant ambitions of growth have a propensity to involve in exporting. (Hamilton, 1998) World Bank Group and other international agencies also providing aid in the shape of assistance to accelerate the growth of small and medium enterprises in developing countries. (Little, et al., 1987) found that small medium enterprises are neither enough labor concentrated nor proved them enhancing the job as compared to large one. (Beck, Demirgiic and Levine, 2005). (Kumar, 2001) considered growth of an

enterprise as an expected determinant of economic growth. (Coase, 1937) suggested that size of the small enterprise imitate the margin in between the market and intra –firm

transaction costs in such a manner that the market transaction cost fall qualified to intra-firm transactions cost the most favorable size of the firm. (Little, Mazumdar, Page, 1987; Snodgrass and Biggs, 1996) provide evidence that predicting labor intensity by the size of the enterprise is not a good predictor of firms growth, as it varies across industries and firm- growth groups in the same industry.

The decisions of giving financing facilities to the small and medium enterprises should rest on the financial strength or income of the SME, there should be a suitable project on which a SME is going to work. If, there will be a failure in the exchange of the information regarding income and the current financial position of the SME to bank that will result during loan evaluation procedure in the default and the measurement in capital gearing (Binks ,1990). The income gearing approach for the banks would be easy to evaluate the future income of the small and medium enterprises and would be easy for them to get loans.

According to the (Berry, 1993), discussing the lending procedures on the bases of financial strengths from the financial information which recommends that if the information would not be appropriate from the small businesses regarding financial performance so it will lead to the unreliability. Banks assesses the income in order to make a decision to provide financing facility and it makes a bank satisfy for repayment of the SMEs and reliability increases. Now, the assessment is first done by the company after the little procedure of methodical budgeting procedure, which includes these documents, profit, capital budgets and the cash. A balance sheet might also be prepared which will help to predict the financial position. According to the surveys of different companies, it is found that the least popular is capital budget, and 30 percent of the companies were not preparing this budget.

As (Pamela Edwards and Peter W. Turnbull, 1994) were proceeding further they found that 11 companies in which ten percent had not prepared information regarding budget. Now, according to interviews taken by these authors it is found that the accountants of small businesses were accepting that the budgeting they are working on are less developed than they would desired. The pressure of time was the most important reason for these lacks of improvements and the reason for these lacking of making budgets none appropriate for the banks were no requirements from the boardroom and other parties.

According the small and medium enterprises budgets are the documents supposed to not to be disclosed any where. Authors found that 25 percent of the small and medium enterprises were allowed to disclose information regarding the budgets. Capital budgets and cash flows were the documents which were more confidential, but some elements of profit which were forecasted were disseminated (Pamela Edwards and Peter W. Turnbull, 1994).

Banks in Vietnam are considering the improvements of the administration of corporate tax and various price imposed on SMEs, after these improvements it is anticipated that there will be a optimistic impact on the financial preferences. Now, the problems such as the cash flows, revenues and financial statements shown by the SMEs to the banks will be in the real position as SMEs doesn’t show it and the problems in this area would be overcome. During assessment of the applicants for the loans bank mostly gives attention to the revenues and cash flows-in order to find out that will the Small business be able to repayment the loan or not. These things push SMEs in Vietnam to depend heavily on the collateral for the loan protection, which slow down SME lending (Nick J. Freeman, Le Bich Ngoc, 2007).

Banks want satisfaction from SMEs that, will SME pay back their loans or will face difficulties, so in order to overcome this difficulty banks has criteria, first one is, banks’ internal regulations, second is, banks regulations and the laws well. These requirements must be fulfilled in order to get financial facilities. According to the bank officers’ consideration which includes: the reputation of the applicant, financial strength of the applicant as well as the quality and quantity of the collateral is being offered by the banks, principle owners and competency of the firm in order to gage out the forecasted revenues. Banks focus to look at each and every useful information regarding SMEs creditworthiness and revenues, but some SMEs do not provide sufficient history of accounting and other documents relevant with profits and revenues because of improper book keeping. Bank officers have found that SMEs does not show true values in financial statements and business plans and hide business transactions. According to the bank officers, financial statements from the small and medium enterprises are not properly audited and unreliable. It is also found that SMEs keep more than one book of accounting in which, 1) For tax authority, 2) For bank, and 3) For their own management due to this, it is hard for the banks to gage out the profitability of the SMEs. According to the findings of (Nick J. Freeman, Le Bich Ngoc, 2007) several transactions by the SMEs are completely denominated in cash, instead of channeled with the systems of the bank. Because of this it is hard for the bank to evaluate the SMEs real cash flow and the position of prfitablity. Now, this is the main reason that banks focus more on collateral requirement from the applicants, as cash flows are inappropriately provided by the SMEs, in order to consider a loan applicant, the requirements from banks could be, machinery, property, inventory or goods, equipment, value papers (saving certificates, and other fixed income papers), and guarantee from the third party can also be considered. In order to achieve a loan facility, SMEs do effort in providing these securities. After considering all these factors now banks are also facing a problem to convert this collateral in to cash that was not able to service their facility of loan.

Commonly, now banks consider some procedures before proving loans, in which the first one is, the application is received by the loan officer. Now, loan officer will check papers relevant to the loan servicing are satisfactory or not. If not, the applicant will be said to require more sufficient papers. Now, the loan officer will examine the financial statements which are very important to find out the revenues of the firm, collateral documents, business plans and creditworthiness of the firm and finally will be submitted to the senior officer to evaluate.

Now the second one is, the report which is submitted to credit department, credit committee or branch director for the agreement. The levels of are different and varies each bank so loan decisions also varies and if the loan is approved after reviewing revenues and financial position, the applicant will be informed and if not, so bank will tell the reason for the none approval .

“According to the banks, SMEs does not provide reliable information regarding financial statements, profits and revenues, so banks are gathering information of the applicant from their customers, suppliers, and also from tax authorities, with the face to face interaction from applicants, and visiting to the sites.” (Nick J. Freeman, Le Bich Ngoc, 2007)

Different banks and managers says that, though it is hard for the banks to get reliable information from the SMEs, so, banks are considering more on qualitative information instead of quantitative (financial statement) about the owner of the firm and reputation to consider providing lending faclities.

There is a system of credit scoring introduced by the banks, through which banks implement the results after scoring and make categories to take decisions for the loans. Now according to the qualitative criteria in which there is firm’s market position, relationship and customer’s debt ratio and current ratio, this is how banks score the clients. Now, according to this information banks make categories such as A, B and C. Now, clients who are loyal and creditworthy fall in category A, clients of category B are considered as good clients, and C category clients are considered as least attractive clients and also find out that, will they be able to reimburse loans (Nick J. Freeman, Le Bich Ngoc, 2007).

The Owners and manager of SMEs towards the expansion of their administrative abilities, knowledge and skills to obtain the professionalism. Some studies shows that the informanal management and low skill employee`s is ineffective factors of SMEs, which will place barrier in the growth of SMEs.(Stan-worth and Gray, 1991) The workforce size and resources always be considerable of the development of the management effect the positive growth of SMEs. The major problem of SMEs found that there is no concept of training and systematic management of their workforce. SMEs faced the problem of Lack of financial management skills due to insufficient information of cost and control. (Thomson and Gray, 1999).

Tranning and development has greater impact on survival and growth of SMEs, some type of MTD-- Management, training and development may be efficient in boasting performance of SMEs. Managers rely on their own to take decision to allocating scare resources of MTD, He is unaware of academic procedure. ( Boocock, Loan-Clarke, Smith and Whittaker, 1998).

The company size range, covered a considerable way behind the international competition in term of correlated qualifications programs such as Bachelors of Business Administration( BBA) , Diploma in Management Studies(DMS) and Masters in Business Administration(MBA).( Smith and Whittaker, 1998).

Ten Years back firms were not focuseing on the broad variety of development idea, now the evidence shows that there is a strong awareness on the incentives and issues relating to management development. Managers should have the clear idea of the strategic value and having strong involvement of formal written policies of the firm.

Determinant of Management Development in small Business


International Economy Organisation Size

National Economy Organisation Structure

Industry Structure Ownership


Production Systems

Industry Growth

National Labour Market Growth

Government Training Policy Internal Labour Market

External Stakeholders Internal Stakeholders


Competitive/Financial Performance

Achievement of Objectives MD CONTEXT Development Policy

Impact of Development





MD ACTIVITIES Methods of Development



Figure 1: Hypothesised determinants of SME management development model

The assessment of casual relationship is used through different variables. Initially, there is a range of possible independent variables which can be labeled as external variables. Internal structural variables refer the personal dimensions of the respondent i.e. Manager or Owner which connect the policy of management development framework. Secondly, the numbers of potential key dependable variables. The broader scope of development system of output constitutes by the independent variables. Third type of variables are secondary dependent variables, which imitating the ways of evaluating the result of an organization system. Which shows the casual factors of respondent i.e. banks. The final type, responders thought that they mainly influenced on management development which known as perceived drivers of the development process. Some problems point out by the potential drivers independent and self-differentiating design, motivation of employee should be maintain as well as deficiency of skills.

The company size range, covered a considerable way behind the international competition in term of correlated qualifications programs such as Bachelors of Business Administration( BBA) , Diploma in Management Studies(DMS) and Masters in Business Administration(MBA).( Smith and Whittaker, 1998).

Ten Years back firms were not focuseing on the broad variety of development idea, now the evidence shows that there is a strong awareness on the incentives and issues relating to management development. Managers should have the clear idea of the strategic value and having strong involvement of formal written policies of the firm.


(Perry and Coetzer, 2009) suggested that normal interest rate adequate collateral requirement and increase in financing facility is result of long term relationship between two entities. The relationship between these entities help banks to forecast the future performance of the SMEs with the help of soft information from the SMEs. Low level of administrative resources and high transaction risk is common factor resulting in the frequent switching of the financial service provider. Frequent switching towards alternative banks is a result of dissatisfaction.

. (Butler and Durkin, 1998) has found that according to different researches, the main sources of SMEs satisfaction are the commercial banks. There is a huge impact of the retention of profitability and loyalty of customers on the growth and stability of banks. In order to increase the loyalty of customer banks should consider giving financing faculties at the time of difficulty. There is a mismatch between the decision making of banks and SMEs which lead towards the problematic relationship.

(Hanley and O’ Donohoe, 2009) discussed that because of the intermediary between bank and SMEs the relationship become stronger and overcome the risks of uncertainties with an appropriate retention of profitability. Intermediary provides sufficient information about the clients financial performance in the market, this helps the lender to take the decision easily about a credit application given by the firm. Another factor in making a relationship weaker is the hidden charges that banks charge on their different services.

According to (Binks and Enneu,1996), there is an opaqueness from SMEs in providing financial information to the banks which results in difficulty for the banks to take decision.

(Torre, Martinez Peria and Schmukler, 2008) suggested that, extension SME financing is not only dependent on relationship but there are other transactional technologies involved that help to increase the arm length lending for SMEs..

(Van Cayseele and Degryse, 2000) has discussed more on relationship that the relation between the borrower and the lender can be enhances further when there will be multiple interactions between them and when bank will offer products to the SMEs then in the future if there will be transactions regarding offered products so both will work together which will result more enhancement in the relationship will be.

( Pennings,1998, Yakhlef,2001) it is a believe that marketing relation plays an important role to increase the loyalty of the customers and easier for banks to take decision regarding financing services.

According to (Brandman and Keeler, 2000), banks have introduced online banking services through which there is an improvement in the efficiencies of work and the relationship becomes strong with the customers because of the online banking which is the easy way to access different options online without going to the bank.

Now as ( Barnes and Howlett, 1998) has discussed that online banking is creating an obstacle ahead between borrower and lender, because of the lacking in the direct contact between two parties.

According to (Thorsten Beck, Demirguc-Kunt and Martinez Peria, 2009) financial performance is the main factor which is being focused by the banks to take decisions for the financial facilities which consists consist purpose of the loan, size of the loan and credit history.

( Stephanou and Rodriguez, 2008), there are some characteristics of the SMEs due to which there is an obstacle towards financing facilities, which includes heterogeneity in their activities, unavailability in formality and unreliability of financial statements and ownership’s low managerial capacity and their family business nature, complicate their assessment of worthiness of their credit and ultimately increases the cost of transaction.

(Ibbotson and Moran, 2003), banks are providing additional banking channel and adopting new technologies for the customers and it is becoming planned requirement for banks.

(Berger and Udel, 2004,Stein 2002), now, there is an advantage for SMEs to get financial services by the banks, which is that, if SME will provide proper and reliable information to the banks regarding financial statements which deals with the information trouble in a very low cost way.

(Udell and Berger, 2003, Uchida, Wako and Watanabe, 2006), banks which are interested in gathering hard information may not refer to the relationship lending, because through the hard information which should be reliable based on financial statement would make an SME transparent in front of the bank, regarding financial performance, after analyzing this information it will be easy for the bank to take decision regarding loans.

(Berger and Scott Frame, 2005), there is a technique which banks are keep on using to gage out the financial performance of the SMEs and decide to provide loan facility or not. There are some scorings and weightings which are related with the personal credit features which include income, debt and time which will be scoring on numerous transactions by the SMEs.

Now as (Berger and Scott Frame, 2005) have discussed that, nowadays banks are focusing on hard information rather than on soft information because of the technological enhancement which is the most preferable for the large banks over small according to the dynamic environment.

According to the (McMahon, 1999), different researches have supported that there is a major problem faced by the SMEs, which is growth, which needs an attention of the management and financial reporters for improvements to survive in this competitive market. Management and financial reporters should analyze all these problems through financial statements to find out their achievements and they should keep up to date regarding every problem.

(Pechlaner, Raich, Zaheer and Peters,2004), several small enterprises are running by the families with a low growth rate which makes them stagnant in position and always being in aloe market and having the employees who are low qualified which creates an obstacle in their growth.

(Hamilton, 1998) World Bank Group and other international agencies are also giving aid in the form of assistance, to enhance the growth of small and medium enterprises in developing countries.

According to the (Berry, 1993), have discussed about lending procedures on the bases of financial strengths from the financial information of the SMEs, that, if these information would be inappropriately given by the SMEs to the banks so it will lead to unreliability. Banks assesses the income of the SMEs in order to make a judgment to give financing facility and it makes a bank convince for reimbursement of the SMEs and reliability increases.

(Nick J. Freeman, Le Bich Ngoc, 2007), throughout the assessment of the applicants for the loans bank mostly focuses to the revenues and cash flows-in order to find out that will the Small business be able for reimbursement of the loan or not. These things drive SMEs in Vietnam to depend seriously on the collateral for the loan security, which slow downs the SME lending.

(Nick J. Freeman, Le Bich Ngoc, 2007) “according to the banks, SMEs do not provide trustworthy information concerning financial statements, profits and revenues, so banks are collecting information about the SMEs from their suppliers, customers, and also from tax authorities and also with the direct interaction from the customer, and sites visiting.”

(Nick J. Freeman, Le Bich Ngoc, 2007), banks have introduced a new system through which banks gage the customers who are loyal and will be profitable for the banks and categorized them in A, B and C. Now, this system helping banks in decision making as well in providing financial facilities to these customers. It includes qualitative criteria in which there is firms’ market position, relationship and customer’s debt ratio and current ratio. Now, the clients who are loyal and eligible they fall in category A, good customers fall in category B and C who are least attractive fall in category C and reimbursement of the loans will be assessed according to these types of customers.

(Stan-worth and Gray, 1991), there should be effective administrative abilities, skills and knowledge in both managers and the owners of the SMEs, because of these abilities there will be professionalism in the SMEs. According to some studies which shows that if there are low skilled workers and informal management in the SMEs then it will lead to the SMEs towards less growth and a major barrier of growth in the SMEs. The size of the work force and the resources of the organization play an important role in effective development of the management and lead organization towards the growth. Some major factors are found in the SMEs, which SMEs do not consider such as, there is not any concept of training and the management which should be systematic for the work force in order to groom them.

(Thomson and Gray, 1999), due to the lack of inadequate information regarding cost and control SMEs face problems in financial management skills

(Boocock, Loan-Clarke, Smith and Whittaker, 1998), there is a great impact of development and training on SMEs’ growth and survival. There is a system called MTD, (management training and development) which has a greater impact on the performance of SMEs, if this system is implemenet efficiently then there will be a boost in the performance. Managers depend on their selves only and take decisions lonely in the allocation of scares resources regarding MTD, because they are not aware about the academic procedures.

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