Financial institutions don’t discriminate against the less educated

30 Jul 2018

A Botswana Institute for Development Policy Analysis (BIDPA) study that considers both entrepreneur and firm characteristics in reviewing the literature on small and medium enterprises’ access to credit has found Botswana’s financial institutions differ with much of the world in a way that most would approve.

“The co-efficients for all categories of education are statistically insignificant, which was unexpected,” writes Goitseone Khanie, an Associate researcher at BIDPA, in the working paper of a study that analysed factors that influence access to credit for Botswana’s SMEs.

“The results imply that access to credit by entrepreneurs with primary, secondary, vocational training and some university training does not differ from those with a graduate degree. This is contrary to a number of studies which found that financial institutions might find it appealing to lend to educated entrepreneurs.”

Part of the rationale advanced in service of the latter is that financial institutions “may also find it appealing to deal with highly educated entrepreneurs as a majority of them are able to utilize borrowed funds accordingly than the uneducated ones.” This thinking has been buttressed by a study that found that the probability of being credit-rationed significantly decreases as the number of years of schooling of the applicant increase. Whether it is a good thing or a bad thing, Botswana’s financial institutions don’t place that high a premium on academic qualifications when processing loans.

Quoting earlier work in a general sense, Khanie notes that owner and firm characteristics generally influence access to credit by SMEs. In the particular case of Botswana, her findings are that access to credit is influenced by gender, citizenship and experience of the entrepreneur, firm-size, sector of business, sales and land ownership. As regards entrepreneur characteristics, the study assesses scholarly findings that commercial banks’ are more willing to extend more credit to older entrepreneurs than younger ones; that women may face greater constraints in the credit market due to their cultural background and some traditional practices; that educated entrepreneurs are always eager to improve their financial market skills, enabling them to present positive financial information before lenders; that there is a high probability that entrepreneurs with higher levels of experience can operate successful businesses than entrepreneurs with low levels of experience.

With regard to firm characteristics, the study notes that the more years of experience a firm has, the higher the likelihood of it accessing credit as experience brings trust to the financial institution and eliminates the fear of possible default; positively, that larger firms have higher access to debt financing than smaller firms and negatively, that SMEs with a few number of employees are the ones that receive credit than those with many employees; that firms with high production volumes and capitalization rates are able to access credit because they can easily produce resources needed for repayment of loans; and that the performance of businesses differs according to the market in which they operate. In terms of figures, additional detail about firm age is that “a 1 percent increase in the market experience of the company increases the chance of getting a loan by 0.03 percent” an, in terms of sales, that as the company increases its sales by 1 percent, its chances of accessing a loan rise by 7.7 percent.

Khanie’s findings were that female entrepreneurs are 14 percentage points less likely to access credit than their male counterparts; that nationality of the entrepreneur matters when it comes to access to credit and that citizen owners are 17 percentage points more likely to access credit than foreign owners; that managers with less than 10 years of experience are 31 percentage points more likely to access credit than managers with more than 30 years of experience, that managers with 10-19 years of experience are 22 percentage points more likely to access credit than those with more than 30 years of experience and that those with 20-29 years of experience are 44 percentage points more likely to access credit than those with more than 30 years of experience; that SMEs in the manufacturing sector are 15 percentage points more likely to access credit than those in the retail and other sectors; that the relationship between the number of employees and access to credit, firms with 20-39 employees are 16 percentage points more likely to access credit than those with less than 20 employees and those with 40-59 employees are 18 percentage points more likely to access credit than those with less than 20 employees; and that firms with 11 – 20 years in operation and those with more than 21 years in operation are not statistically different from those with less than 10 years in operation when it comes to access to credit.

On sales, the study found that enterprises with sales of P500 000 and below are 12 percentage points less likely to access credit than those with sales of more than P1 million and less than or equal to P10 million; that those with sales of more than P500 000 and less than or equal to P1 million are 28 percentage points less likely to access credit as compared to those with sales of more than P1 million and less than or equal to P10 million; and that firms with sales of more than P10 million and less than or equal to P100 million and that those with sales of more than P100 million have insignificant co-efficients, implying that their probabilities of accessing credit are not statistically different from those with sales of more than P1 million and less than or equal to P10 million.

“An enterprise is more likely to access funds from a financial institution if it has a pool of assets to show as collateral,” notes the study which used land as a factor of production to determine the position of a firm in providing assets as security for the loan.

“The results indicate that ownership of land is positively related to access to credit. Enterprises that operate on a fully owned piece of land are 15 percentage points more likely to access credit than those that only own part or do not own the land in which they operate. A plausible explanation for this is that land ownership provides an acceptable collateral for loans by financial institutions. Another factor that could influence a firm’s ability to secure funds is if it has its financial statements checked and certified by an external auditor annually,” the study says.

Khanie’s recommendations are that banks should cut the rigid collateral requirements and develop products suitable for SMEs. With regard to public policy, she recommends that it should both pay attention to the diversities of SMEs’ socio-economic characteristics as well as the business setting in which they operate when implementing finance assistance programmes and also focus on strengthening the business acumen of SMEs through training and workshops such that they become attractive to financiers.