Banking Relationships A Mauritian Study Commerce Essay

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The importance of SMEs to world economies is well documented (Birch 1989; Storey 1994). SMEs make up the largest business sector in every world economy (Culkin & Smith 2000), and governments around the globe are increasingly promoting and supporting SME growth as part of their overall national development strategy (Abdullah & bin Bakar 2000). According to the Mauritius Employers' Federation (MEF), small businesses have been the engine of job creation in Mauritius since 1990. The number of jobs in small firms has increased by 140,000 in 1991 to reach 249,500 in 2011, equivalent to an annual growth of 3% and small businesses accounted for 44.5% of total employment against 32% in 1990. Moreover, according to Small Enterprise to Help Development for All (SEHDA), Today's small businesses are tomorrow's multi-national giants, so it essential they are given the help and support when it is needed most. Thus the well-being of these firms is a necessity for the country's future success. In Mauritius, bank debt is the primary choice of financing for SMEs. Yet the relationship between banks and SMEs may be sometimes difficult to manage and is often strained. The relationship between banks and small entrepreneurial firms has been the subject of much attention over the years and has been closely monitored by many parties in more recent years (Binks et al., 1989; Butler and Durkin, 1995, 1998; Binks and Ennew, 1998; Connolly, 2000; Bank of England, 2001; Madill et al., 2002; Ibbotson and Moran, 2003). For small to medium-sized enterprises (SMEs), banks represent an important and indispensable business partner since they facilitate several functions necessary for SMEs' survival (Madill et al., 2002; Trayler et al., 2000). Major changes regarding the establishment of financial institutions operations are occurring in the relationship between banks and small and medium-sized enterprises (SMEs). When personal contact between customers and banks decreases, disintermediation results (Ding et al., 2007; Santos, 2003) thus, banks need to ask themselves questions regarding the value of personal relationships (Dabholkar and Bagozzi, 2002; Meuter et al., 2000; Parasuraman and Grewal, 2000). There are many reports indicating obstacles and problems for small business firms in general, when it comes to financial services (Nutek, 1994; Storey, 1994). For instance, Murray and Wallbridge (2000) emphasis the fact that "the major banks have never really liked small business customers" and assert that banks are quite often ambivalent towards such clients. Likewise, a number of reports have emerged stating that the structural changes in financial institutions have resulted in decreased satisfaction among customers. The Wilson Committee, as part of its review of the functioning of financial institutions, found lack of discretion of local bank managers, lack of understanding of local industries' needs and the personal guarantees demanded of business owners to be the key areas of criticism in the small business/bank relationship (Bevan, 1978). Butler and Durkin (1995) reinforced these criticisms when they identified problem areas between banks and their small business customers as being in relation to "matters of lending criteria, empathy and counsel". This decrease in customer satisfaction has not gone unnoticed by various financial institutions. To improve banking services targeting SMEs, the European Commission (2007) has instituted new codes of conduct. In the UK, the Financial Services Authority (2007) promotes the "treating customers fairly" initiative, and a new financial advisory law has been enacted in Sweden (Svensk Fo¨rfattningssamling, 2003). Thus this study reports on research that adds to understanding of the relationship between bank lenders and SMEs owner. It also identifies the determinants that relate to SME owner's satisfaction with the main financial institution with which they have key relationships. The next section of the study reviews the context for the study and the relevant literature.

Problem statement

According to Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius (2011), he believes that SMEs are critical for our future prosperity given that it has been placed on the national agenda by the Government. Indeed, the Government of Mauritius has endeavoured to bolster the SME sector by providing various incentives, including industrial space and special grants amongst other measures. But, however SMEs continue to face major problems with their banks in Mauritius. Banks are resilient to give loans to them. In order to reduce the perceived higher objective risk and moral hazard associated with lending to small firms both interest rates and collateral were increasingly utilized by banks. Moreover they are not satisfied with banks that focused on selling their bank's products.

On the other hand, small business sector is believed to be of significant importance to banking institutions, in terms of the number and value of accounts (Binks et al., 1989) and is thought to provide a considerable amount of a retail bank's profits (Carroll, 1999; Connolly, 2000). Thus SMEs owner's satisfaction is important for banks as bank-SME relationship is not only beneficial for small businesses, but it can also provide huge benefits for a bank, in that it allows them to gather and analyse much more accurate customer information. They offer the greatest profit opportunities for the banks and also gives referral to other SMEs. As a matter of fact, assessing the level of customer satisfaction become important in order to determine how this situation can be improved.

A problem that may arise during our research is that we will not be able to survey the entire target population as it will be too time consuming and too costly. Therefore, a sample must be made which will inevitably encounter a degree of inaccuracy in our results.

Aims &Objectives

The aim of this study is identify the determinants of SME owners' satisfaction and the impact of SMEs satisfaction on customer recommendation of the bank to others (positive word-of-mouth).

The objective of the research:

To determine the key drivers of SME satisfaction related to a variety of aspects of the bank-SME relationship

To determine whether personal relationship with banks gives greater satisfaction to the SMEs

To investigate whether a good relationship with the SMEs yields long term profitability for the banks

To find out whether a good bank-SME relationship encourages referral from the SME owners'

Literature review

Customer Satisfaction in the evolving bank-SME relationship.

In response to increasing competition, most firms in the financial sector have been forced to place an increasing emphasis on establishing and maintaining customer relationship (Lam and Burton, 2006;Perrien et al., 1993; Ennew et al., 1990). According to Ennew and Binks, 1999; GrÃ-nroos, 1990; 1996), the satisfaction of the SME consumer will be dependent, at least in part, on the way the bank interacts with the customer and managed the relationship. Tyler and Stanley (2002) recognised that successful exchanges between banks and their SME customers depended on the existence of a close and personal relationship between the parties. In addition, a close working relationship can give rise to efficiency in action, reliability, cooperation and effective communication between the parties involved. Moreover, strong relationship between financial institutions and SME Owners' has advantages for both banks and SMEs. Advantages for the sellers of financial services include ability to maximize profits by reducing risks, improves information flows, more satisfied customers and enhanced loyalty. Whereas the advantages for the SMEs consist of greater finance, favourable rates on loans, higher perceived quality of service, reduced stress, avoidance of switching costs and increased convenience. It is also argued that developing satisfactory relationships with SME clients are expected to result in higher satisfaction on the part of those clients. In turn, it is expected that satisfaction will lead SME clients to give referrals to others and a decreased likelihood of switching to the services of another financial institution (Barnes and Howlett, 1998; Berry, 1995; Ennew and Binks, 1996; 1999; Morgan and Hunt, 1994; Seal, 1998; Sharma et al., 1999; Zineldin, 1996). Some studies have also indicated that most corporate customers still prefer human interaction with their banks, despite the fact that the banking industry has undergone a technological revolution (Curry and Penman, 2004; Paulin et al., 2000). According to Proença and de Castro (2006), he contended that banking business is not a matter of one discrete episode; rather, it is more often a continuous interactive deal between the bank and the customer, which covers a 'non-ending' string of transactions. Thus, bank-customer relationships should not end at the door of the bank. Hence, customer satisfaction is considered as a key factor in the long-term profitability of most financial firms.

Consequently we hypothesise the following:

H1: the more personal the SMEs perceive the relationship with their banker to be, the higher the long term profitability for the bank.

H2: the more personal the SMEs perceive the relationship with their banker to be, the higher their level of satisfaction will be with the bank

H3: the more satisfied the SMEs, the less likely the SME will switch banks

H4: the more satisfied the SMEs, the more likely the SME are to give referral.

The problems of small firm - bank relationship

Given their distinctly different characteristics and experiences, it should not be surprising that small firms and banks find it difficult to develop good working relationships. Following Mintzberg's classic categorisation of organisation structures, the bank is a "machine bureaucracy", wherein rules and regulations tend to supersede managerial discretion. Decisions are routinised; unanticipated problems upset systems and managers. In contrast to this, the typical entrepreneurial small firm is organic and informal - the "simple structure". The SME Owner's makes his or her own decisions, usually quickly, and often intuitively. In Butler and Durkin (1995) it was ascertained that small firm owner-managers and bank managers had self-perceptions and perceptions of each other that were often "critically mismatched". For instance, where the bank felt itself (indeed, prided itself) on being procedural, systematic, and prudent, the small firm perceived those factors as obstructive, procrastinating and fearful of natural commercial risk. On the other hand, where the small firm perceived itself to be risk-taking, entrepreneurial and innovative, the bank perceived it to be foolhardy, immature and lacking in an understanding of commercial consequence. Previous research about bank-SME relationships indicates that most SMEs do not appreciate doing business with bankers who are extremely focused on selling their bank's products and who view the availability of collateral as superseding everything else in importance (Cowling and Westhead, 1996; Harrison, 2001). Instead, they expect their bank to adopt a customer-centered marketing strategy that encourages individual bankers to work toward meeting their specific needs (Zineldin, 1995; Adamson et al., 2003; Lam and Burton, 2006). Banks have been criticised as being too standardised in their approach when dealing with SME customers. The main issue of complaint has been that bankers routinely do business with customers according to the rules, norms and policies of the bank but do not pay much attention to the needs of customers (Bick et al., 2004; Butler and Durkin, 1998). When interacting with customers, individual bankers have furthermore been criticized as being too focused on selling their bank's products instead of trying to understand their customers' specific needs (Harrison, 2001). Thus, banks that provide advice regarding growth, marketing, strategy, and product or service design often succeed in developing close long-term relationships with their SME customers (Huse, 1998; Jay and Schaper, 2003). In accordance with the previous discussion, we hypothesise the following:

H5: The more the SMEs perceive the bank to be focused on products, the lower their level of satisfaction will be with the bank

H6: The more the SMEs perceive the bank as having overly rigourous demands regarding collateral for loans, the lower their level of satisfaction will be with the bank

Research Methodology

For the purpose of the analysis, the data collection methods that we proposed for this research is through survey and questionnaires. A quantitative based will be conducted through questionnaires that will be distributed to the SMEs and Bank managers. Another method of collecting data is through using the documentation that is newspapers, articles, brochures that they already have. This will help us to have a thorough understanding about bank-SME relationship in Mauritius that we will use later on for our empirical research.

We will make a sample of the target population. The target respondents for the questionnaire will be owners of small firms. A sample of a 100 SMEs with less than 50 employees in both urban and rural areas across the country will be chosen. A stratified sampling strategy will be applied where the characteristics of SMEs are used as the basis of selection, most often chosen to reflect the diversity and breadth of the sample population. The stratified sample is obtained by independently selecting a separate simple random sample from each population stratum. The population is divided into different groups based on characteristics such as size, location of the respondent that is whether he or she lives in the urban or rural region and age of the person. All interviewees were asked to provide demographic information about their company, information relating to the number of banks they are currently using and the key reasons for them to stay with their main bank.