Challenges faced by SMEs in raising finance

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Chapter 3

Research Methodology

3.1 Research Objective

The main objective of this study is to investigate the constraints facing Mauritian manufacturing SMEs in raising bank finance. The research attempts to examine the extent to which firms’ and owner managers’ characteristics influence access to bank finance. It further looks at the factors considered by banks in providing finance to SMEs and finally this study probes reasons for banks rejecting SMEs application for loans.

3.2 Data Collection Method

It has been argued that the problem of interest (research question) directs the choice of method (Yin, 1994). Webb et al. (1966) suggest that researchers are likely to exhibit greater confidence in their findings when these are derived from more than one research method. As a result, in order to achieve our objectives, primary data was collected through both a questionnaire and by conducting an interview. On the other hand, secondary data was obtained from the CSO and SMEDA.

For the purpose of this study, face-to-face interviews and telephone survey were used to collect data from SME owners. However, most prior research has been static and survey-based and provided only limited insights into the bank financing issues faced by SMEs. Within low-developed research areas, such as small business finance, it is essential that fundamental surveys are carried out, in order to achieve a broad understanding of the “playground” (Landstrom, 1987). This deeper understanding is reached following a qualitative methodological approach, such as interview. Therefore, in order to get a better insight into the issues surrounding the supply side of finance, an interview was conducted with managers of two different banks namely, MCB and DBM. The aim in qualitative sampling is to understand the phenomenon of interest and to focus on specific issues. MCB was chosen since it is the largest domestic banks and as for DBM, it is known to be a big provider of finance to SMEs. For the purpose of carrying out the interview, an interview schedule was designed as per Appendix A. The combination of both qualitative and quantitative methods in this research led to a rich and comprehensive database. Thus, improving consistency and reliability and allowing for more in depth investigation into the subject.

3.3 Survey Sample Frame and Response rate

For the purpose of the survey, the sample was drawn from the directory of SMEDA. The official database of operational small to medium-sized manufacturing firms operating in eight diverse industry groups[1] registered with SMEDA was chosen as the sampling frame. The manufacturing sector has been selected for this study since it is an important sector of the economy as it creates job and contribute to economic growth. Along the same line, by focusing on a single, narrowly defined sector rather than examining more than one sector, the problem of heterogeneity bias is avoided. A stratified sampling method was used so that each of the eight industry groups is represented. As the study covers a large population, a sample of 150 SMEs was selected to reflect the eight industry groups mentioned above. However, due to time and cost constraints, a total of 81 survey forms were collected out of a sample of 150 firms, representing an effective response rate of 54 %.

3.4 Questionnaire Design

To start with, the purpose of the survey was clearly stated and respondents were given the assurance that the information being collected through the questionnaire will be highly confidential and will be used for the purpose of this study only. The survey instrument adopted for this study contains 23 questions within 2 major parts. The questions are of multiple types. While only a few questions are open-ended, others are mainly close-ended questions where the respondents can answer by a simple ‘yes’ or ‘no’ answer to one which requires assigning of ranks to answers. An ‘other’ alternative was provided on many questions, and respondents were encouraged to write in comments wherever they felt appropriate. Some questions are accompanied by a 5-point Likert scale allowing perceived indication of the extent to which the item is a constraint in raising bank finance. The Likert scale ranges from 5 (extremely constrained) to 1 (not a constraint at all). A copy of the questionnaire is provided in Appendix B.

Section 1: This section of the questionnaire aims to collect demographic data of the owner-manager and the small business. It contains gender, qualification, experience, years in business, size, business legal status and industrial sector. This has allowed assessing the extent to which firm’s and owner-managers’ characteristics has influenced access to bank finance.

Section 2: This section deals with bank financing issues and is designed to help identify the barriers faced by Manufacturing SMEs in raising bank loan. This section also asks question relating to financing preferences of owner-managers.

3.5 Pilot -Testing

The interview schedule as well as the questionnaire is based on an extensive review of the literature and through consultations with owner-managers and other key stakeholders involved with the small business such as SMEDA and DBM. Prior to finalising the instrument, a pilot test was carried out with four small enterprises. As for the interview, DBM was visited to test the questions. The results of the pilot study were helpful in refining the survey instrument and to reduce the possible impact of apparently ambiguous questions or questions which appeared to be sensitive or difficult to answer.

3.6 Validity and Reliability

The data collection spans over a month and visit to some participants have increased the validity. Furthermore, the approach to pilot testing in itself is a way of ensuring content validity (Litwin, 1995). The interviews have also proved to be a valuable means.

On the other hand, reliability is defined as the consistency of measuring device (Spector, 1981). This was achieved by careful attention to wording used in the survey, multiple questions types and as many closed questions. Reliability of the interview was tested by asking the interviewees to confirm the summary made on the fact sheet.

3.7 Analysis

The data was analysed using the Statistical Package for Social Sciences (SPSS) version 20 applying non-parametric tests. Mann-Whitney and Kruskal-Wallis tests and chi-square tests were used for ordinal and nominal variables respectively.

3.8 Variables used in the study

The dependent and independent variables used in the study are shown in Appendix C.

3.9 Limitations of the study

There are several factors which possibly restrict the conclusions which may be drawn and the generalization of the results. Most of the SMEs contacted were no longer doing business and also most of the number dialled were no longer in use or switched off. It is to be pointed out that the Mauritian business community is not used to this kind of survey. Many owner managers flatly refused to participate for fear of disclosure of confidential information. Hence, only limited information was available making it difficult for analysis. Finally, the study has all the weaknesses of a survey. For example, the respondents could be influenced by their perception of what seems to be a desirable response rather than stating the actual attitudes. As for the interview, it was difficult to get access to banks. Hence, this was only possible through networking.


[1] The industry groups include Chemical, Rubber and Plastics (CRP); Metal Products (MP); Paper, Products and Printing (PPP); Jewellery (JW); Leather and Garments (LG); Handicrafts, Pottery and Ceramics (HPC), Wood and Furniture (WF) and Food and Beverages (FB).

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