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Sample Entrepreneurship Dissertation

The Role of Banking Institutions in Promoting Entrepreneurship: A Case of French Small and Medium-Sized Organization

Chapter 1: Introduction

A significant number of studies in economic literature have related the economic growth of a nation and aspects of entrepreneurship development to the institutional environment of banking institutions both indirectly and directly (Ahlstrom & Ding, 2014). At the most general level, the authors of the different studies have examined the role of financial institutions in economic development, arguing that the nature of financial institutions in a country are the key determinants of entrepreneurship development (Chowdhury, Audretsch & Belitski, 2019). Much research on entrepreneurship has focused on social, psychological and economic factors that promote entrepreneurship activities, the latter focusing mostly on the role of banking institutions. According to Sussan and Obamuyi (2018) finance is one of the vital requirements to any enterprise, justifying its postulation as a major factor that support entrepreneurship activities.

Entrepreneurship activities according to Bosma, Sanders and Stam (2018) entails the attempts made by individuals to start up a new company, that results in self-employment. Entrepreneurship is also concerned with the investment in new business opportunities that have not been exploited by others in a specific industry of business operation. In most instances, the engagement in entrepreneurship activities results in the development of small and medium-sized organization (SMEs). The SMEs, plays a significant role in contributing towards the growth of an economy (Liñán, Paul and Fayolle, 2019). In the French economy for instance, the SMEs financial contributions accounts for more than half of the turnover generated from companies operating within the economy. It is also reported that the SMEs has more than 10 million employees that accounts for approximately two-thirds of the total employment in France.

Analysis of the financial performance and economic relevance of the SMEs indicates that they play a major role on matters economic growth and development. Their weight in the economy notwithstanding, SMEs have constantly complained about severe financial constraints (Igwe, Onjewu & Nwibo, 2018). While a significant number of SMEs in France have favorable capital structures, others have reported difficulties in accessing financial aid to foster business growth and expansion. Consequently, most SMEs are underperforming or operating on low capital structure. It is important that the complaints on accessibility of finances is addressed to enhance the operations and performance of the SMEs that will result in a positive change in the economic growth of the region.

Different studies have documented the importance of SMEs to entrepreneurs and the economy as a whole. The development of an economy is determined by the performance, stability and growth of the various SMEs operating within its boundaries. According to Khan and Anuar (2018) banking institutions are labelled as major factors that promote entrepreneurship activities and development, including the creation and management of the SMEs. Banking institutions are considered major players in the growth and development of SMEs. This is drawn from the belief that finance is an essential requirement to any new start-up that desires to grow and perform well in its industry of operation (Liñán, Paul and Fayolle, 2019). In most instances, these finances are lacking within the structures of the small and medium sized enterprises, forcing them to opt for burrowing, services that are mostly offered by the banking institutions.

Despite the existence of different kinds of banks in an economy, SMEs have constantly complained about financial constraints and their inability to grow and establish their enterprises. Besides the stagnation in growth of the SMEs, a reduction in the number of entrepreneurship activities being initiated in an economy have been reported, in instances where accessibility to banking institution have been limited (Jasimuddin & Naqshbandi, 2019). Entrepreneurship activities, and specifically SMEs arising from such activities play a major role in the growth of the economy, as such it is important that all issues affecting their operation and performance are assessed and amicable solutions offered (Liñán, Paul and Fayolle, 2019). This justifies the need for the current study that explored how banking institutions promote entrepreneurship activities, focusing on their role in promoting the operation and growth of SMEs in France.

Research Questions and Research Objective

It is reported that SMEs contributes significantly towards the growth of the economy, based on their turnover, role in creation of employment and importance in exploitation of various opportunities presented in different sectors of the economy. Entrepreneurship also assists in increasing national income and creating innovation, all of which contributes towards increasing the economic growth of a nation. Creating an enabling environment for entrepreneurial activities, especially for operation of SMEs becomes crucial to ensure they are well established.

Despite the acknowledgement of the significance of SMEs to an economy, they still face many challenges in their operations and growth. Limited finances and inability to access financial assistance from relevant bodies are the major challenges faced by most SMEs in different economies. It is thus important that the issue of financing as a major concern of the SMEs is explored to avail suitable recommendation that when implemented will ensure that the SMEs have a wide access to financial resources needed for their business growth and expansion.

The main aim of the current study is thus to explore the role of banking institutions in promoting entrepreneurship, focusing on the relevance of the institutions to SMEs in France. The study begins with the discussion of the concept of entrepreneurship as applicable in SMEs as well as the role of the SMEs in an economy. This is followed with the discussion of the probable sources of financial lending that are available to the SMEs. The role of the government, and banking institution in the provision of the financial services, and the challenges they face in order to meet the financial needs of the SMEs are also discussed. The challenges experienced by the SMEs in France to access finances are then discussed and an evaluation of the effectiveness of the banking institutions and the government in responding to the identified challenges done. The study culminates with the presentation of the recommendations and suggestion that should be implemented to enhance the accessibility of finances to SMEs in France.

The following research questions are explored

  • What is the role of SMEs in an economy?
  • What are the sources of lending available to SMEs in France?
  • What are the financial based problems faced by SMEs in France?
  • How does the banking institutions in France contribute to the growth and development of the SMEs in the region?
  • What strategies can be implemented to improve the financial access of SMEs in France?





Definition of the Essential Terms of the Topic

Banking institution

A banking institution is a kind of financial institution that deals in financial and monetary transactions such as loans, deposits, currency exchange and investments. The bank can range from a large financial institution with a strong brand name and global presence, to just a small business that operates locally. Irrespective of the size, a banking institution offers financial services such as lending, corporate finance, housing, project finance, trade and others.

In France, banking institutions accounts for the larger share of the financial institutions in the region. There are more than 400 banking institutions in the region. These banks have been classified into four units including, bank of France, deposit banks, investment banks and banks offering medium- and long-term loans.

Bank of France– Is the country’s monetary authority. The functions of the bank of France include formulating monetary and credit policies, setting interest rate and ensuring there is an orderly and smooth functioning of the banking system


Entrepreneurship is defined as the act of creating a business or businesses and improving it to generate profits. The term is also defined as the exploitation of opportunities through executing innovative ideas to create new business and operate in an environment that was previously underexplored. The main aim of entrepreneurship is to create innovative products and/or services that challenges the status quo of the daily operations and how people live.

Type of Entrepreneurship

Small businesses – Small businesses represent the overwhelming majority of entrepreneurial ventures across the globe. A small business refers to any company, restaurant, or retail store that’s launched by a founder, without any intention of growing the business into a chain, franchise, or conglomerate. This kind of businesses require capital and adequate finances for initial investments that will enable them make profits from the business activities.

Medium-sized and Scalable start up- medium-sized and scalable startups tend to not only focus on thriving but also on growing and expanding into other markets. These businesses often begin on a very small scale, just as an idea, and are then nurtured and scaled typically through the involvement of outside investors, until it becomes something much larger. The medium-sized and scalable startups require capital for initial business investment and for the growth and expansion of the business.

Large Company- Sometimes, entrepreneurship activities are done within the context of a larger, established company. This is achieved through careful market research that results in the identification of a business opportunity that can be exploited to address certain gaps within the market. Financial assistance is needed in this instance to support the development of the new product and/or services, as well as to facilitate the launching of the product.

Social Entrepreneurship- This refers to the process of carrying out innovations to come p with unique-community based projects. In essence, social entrepreneurship is concerned with launching or products and services that are concerned with the creation of a positive social change within the society. Such changes may include conservation of the environment, racial justice, or philanthropic activity in an underserved community.


A small and medium-sized organization is a business that maintains its assets, revenue and number of employees below a certain threshold. The criteria for determining and categorizing a company as an SME various from one country to the next, and probably from one industry to another. However, there is a set of thresholds that is applicable in the global sphered. Overly, a business with fewer than 250 employees, is considered an SME.

Overview of the Thesis

Chapter 2 presents the literature review on the role of banking institutions in promoting entrepreneurship, focusing on their role in supporting the operations and growth of SMEs in France. Five main issues in relation to SMEs financing and growth are reviewed, the significance of SMEs to the economy, sources of funding available to SMEs, financial problems and challenges faced by SMEs, the role of banking institutions in promoting the growth and development of SMEs, and the strategies that can be put in place to address the financial problems and challenges of the SMEs.

Chapter 3 details the theoretical framework of the study. Specifically, financial inclusion theory, imperfect information theory and minimalist approach are discussed as the theories underpinning the study.

The fourth chapter details the qualitative methodology adopted in the collection and analysis of the data collected from the chosen study participants. A detailed description of the sample size, sampling techniques employed in the study are discussed. Also, the data analysis methods adopted in the study are discussed. The chapter culminates with the discussion of the ethical issues taken into consideration during the study.

The fifth chapter presents the themes that emerged from the interviews conducted to ascertain the role of the banking institutions in fostering entrepreneurship. The major themes are categorized into: The importance of SMEs to an economy, Sources of funding available to SMEs in France, the role of the banks in entrepreneurship and solutions to address the financial problems of SMEs.

In chapter six, the resulting themes and qualitative findings are discussed in relation to the research questions of the study, and their contributions to the existing literature.

Chapter seven presents the summary of the findings attained, identifying areas for further improvements to address the limitations encountered in the study.



Chapter 2: Literature Review

SMEs accounts for a significant part of enterprises and a large share of employment in most economies. According to Halberg (2018), SMEs offers more than 60% of the employment observed in the underdeveloped and developing economies. Globally, it is reported that SMEs have played major roles in the development of most economies in the Western, and Asian region. The economic boom reported in the regions have been attributed to the growth and expansion of the SMEs (Tanzer, 2005). In India, SMEs are labelled as the major drivers of innovation and competition. The SMEs accounts for more than 50% of the manufacturing output and exports in the country. Consequently, the SMEs are considered the major contributors in the development of indigenous entrepreneurship in the region, as well as the growth and integration of industries.

Such significant contributions of SMEs to the growth of economies have also been reported in the developed economies. The growth of the American and European nations has been attributed to the significant expansion of the SMEs that have been reported overtime. According to Han, Xiang and Yang (2018) SMEs are the predominant form of enterprises in the developed economies, they account for more than 80% of all the firms. The SMEs also proved the main source of employment to the citizens, as they account for more than 70% of the employment evident in the developed economies. Amoah and Amoah (2018) have also asserted that the SMEs in the developed economies are major contributors of value creation and promotion of value addition activities in different sectors. The role of the SMEs in the growth of the economy is also profound in developing and underdeveloped economies. Taking into consideration the input of informal businesses in an economy, it can be deduced that SMEs play a major role in promoting employment and enhancing the GDP values of most countries, irrespective of their income level.

SMEs in France are the main source of employment (60% of jobs) and contribute to 55% of value added. SMEs constitute an unbalanced set of three categories: by January 2010, micro-enterprises (0–9 employees) account for 94.25% of all SMEs, whereas small enterprises (10–49 employees) and medium sized enterprises (50–249 employees) account in respect for 4.80% and only 0.79% (OSEO, 2011). Data may not always be consistent with the SMEs surveys upon small samples (one thousand firms as for France) the European Commission, together with Eurostat and the ECB have designed since the early 2000, especially regarding access to finance.

Based on the importance of SMEs to an economy, it is expected that the government of various countries will work towards encouraging the entrepreneurial activities being initiated by the small and medium-sized organizations. However, as reported by Khan and Anuar (2018) most of the SMEs still face serious challenges in their operations that have significantly retarded their growth overtime. It is reported that financing is one of the major factors that challenges the growth and development of SMEs (Oluntunla, 2001). Williams (2006) reported that having access to finances enables the SMEs to acquire new technologies for production, and growth of the business.  Further enabling them to contribute towards the growth of the economy. Despite this knowledge, financial constraint is a major challenge that most SMEs are still facing in various economies. The accessibility of the initial capital for business start-up as well as additional amounts to foster the growth of the formulated business has been a major challenge to many SMEs. It is thus important to explore the issue of capital financing to the SMEs, and determine the approaches that can be explored to address the financial challenges faced by the SMEs in France, if any. The review of literature begins with the discussion of the importance of SMEs to the economy, Financing options available to the SMEs and the accessibility of finances to the SMEs, as well as the role of the banking institutions in fostering the growth and development of the SMEs.

The Role of SMEs in an Economy

Different studies on SMEs and their role on the economy, have reported their significance in the growth and development of the economies. According to (2) the SMEs constitute essentially in the lubrication and development of any economy. In the OECD area, it is reported that the SMEs provide the largest source of income and new jobs to the citizens of the different countries (OECD, 2005). The weight of SMEs in the economy is increasing, as the productivity and the growth of the economy is inherent in the emergence and the growth of the small enterprises. Extant literature lends credence to the important role played by SMEs in supporting the growth of the economy in America. Studies have pointed out that more than 50 million SMEs operate in Latin America and offers more than 120 million employment opportunities to the citizens.

In Europe the role and significance of SMEs towards the economy have been reported. Južnik Rotar, Kontošić Pamić & Bojnec (2019) in their study looked at the contribution of the SMEs towards employment within the European Union. The authors made use of panel data model during the 2005 and 2016 period to determine whether the SMEs employment had any major effects on the overall European Union employment (Amoah & Amoah, 2018). The panel econometric data attained by the scholars, confirmed that there is a significant association between the SMEs employment and the overall economy employment in most countries within the European Union. However, the scholars indicated that the contribution of the SMEs service sector towards employment was more profound than the input of the SMEs in the industry sectors was insignificant.

Previously, Herr and Nettekoven (2018) looked at the role of SMEs in the development of an economy focusing on Germany. Based on the review of previously documented information by other scholars, the study indicated that SMEs in German are considered as the backbone of the German economy. According to the BMWi’s report more than 99.6% of the firms in German were SMEs, that created 58.5% of the jobs in the region. These SMEs also constitute 54.9% of the net value of Germany as at the year 2018 (IfM Bonn, 2018). Similar findings were reported by Kruja (2013) who looked at the contribution of the SMEs on the growth of an economy taking the case of SMEs in Albana. The researcher reported that SMEs in the region consist of the majority of the private businesses and are considered the main source of employment generation. The study findings revealed that the growth of the Albanian economy is mostly driven by the development of small and medium sized enterprises, that is not just based on the increase in the number of new start-ups but also a positive change in the business environment and entrepreneurial skills. According to the scholars, SMEs can only contribute to the growth of the economy, when they are developed and their performance enhanced overtime.

While exploring the importance of SMEs to the economy, Južnik Rotar, Kontošić Pamić & Bojnec (2019) indicated that SMEs contribute to the growth of the economy through employment creation, building of added value in business and enhancing the export activities and GDP of the country. The scholars, however, reported that such benefits can only be attained, when there is a significant growth of the SMEs (Južnik Rotar, Kontošić Pamić & Bojnec , 2019). Through promotion of innovation and new technologies, it is anticipated that significant growth of the businesses will be reported. Also, entrepreneurship education and training promote the growth of the businesses, further enhancing the ability of the SMEs to contribute towards the growth and development of an economy.

In France, about 99% of the companies registered by the National Institute of Statistics (INSEE) are SMEs (Economix 2018). The SMEs in this region have equally played a significant role in supporting the growth and development of the economy. According to Biney (2018) more than 50% of employment in the economy are attributed to the employment opportunities offered by SMEs in France. More than 9 million people were employed by the SMEs in France in the year 2018. The number is expected to increase in the subsequent years, with the significant growth in the size and values of the SMEs that have been reported over time (Statistica, 2018). SMEs in the region, thus play a major role in enhancing the development of the French Economy.

Most studies exploring the role of SMEs in economies have reported a positive outcome (Južnik Rotar, Kontošić Pamić & Bojnec, 2019). As much as significant benefits are reported in the countries in the developing and emerging economies, it is important to note that the SMEs in the developed region have also played a major role in impacting on the development of the economies through creation of employment and contributing towards the nation’s GDP positively. While most scholars have indicated that SMEs are beneficial to an economy, Abbasi, Wang and Alsakarneh (2018) have reported that such benefits can only be attained, when there is a continuous growth of the SMEs in terms of capitalization and overall profitability. Biney (2018) in their study indicated that unless the growth of SMEs is not only attributed to the expansion of new start-ups, but is also linked to the increase in the performance and overall profitability of the existing small and medium sized businesses. There is thus need for an economy to implement policies that will ensure the continuous growth and development of the SMEs is reported, thus contributing positively towards the growth and development of the economy as a whole.                                                                                                                                                                                                                                          Financing Options of SMEs

Having a strong capital base is one of the major requirements for any SMEs to register significant growth over time. According to Bendell (2017) capital is needed for new business start-ups as well as growth of existing businesses. Unless the entrepreneurs have access to adequate capital to use in the formation of new small and medium sized business or grow the existing ones, the positive impacts of such organizations on the economy cannot be achieved. Financing is thus a critical intermediate factor that influence the relationship between the performance of the SMEs and the growth of the economy.

Different financial options are available for SMEs. According to Fatai (2009) every organization is financed either through equity or debts or a combination of both. The different types of financing for the organization are sourced mostly from financial institutions. While there are informal and formal financial institutions that offers financial assistance to various enterprises, Aruwa (2004) have reported that the formal forms of financial institutions, mostly banks are the major sources of finance for the SMEs in different economies.

Banking institutions have played a significant role in financing the SMEs in different economies across the world. In the developed economies, commercial banks, international development agencies and microfinances are the major agencies that offer financial assistance to the SMEs (Abbasi, Wang & Alsakarneh, 2018). Similar categories of financial institutions also play a major role in financing the activities of the SMEs in the emerging economies. However, Fatai (2009) has reported that the commercial banks are considered the major contributors of finances to the SMEs. On the contrary, SMEs in developing economies, mostly obtain their financing from informal types of financial institutions, due to the limitation in securities or surety to guarantee their accessibility to the financial aid.

In some countries in Asia and Latin America continent financial institutions are not the only source of money for SMEs. Large firms are a major potential source of finance. Because big firms can do a lot to help SMEs get finance more easily by transferring resources (money and factors of production) and guaranteeing SME solvency with financial institutions (Abbasi, Wang & Alsakarneh, 2018). Links with major companies can also help SMEs get export credits, which are especially important in countries with weak institutions, since commercial partners are better informed than other creditors (especially financial institutions) about the ability of their customers to repay debts (Bendell, 2017). Export credits have been proved useful in Zambia’s agro-food industry. Subcontracting is still uncommon in Africa, but has grown-rapidly in South Africa since 1998, though there is increasing skepticism about it because it may confine SMEs to low-skill informal activities. Clusters of SMEs, which are very active in Asia, enable member firms to seek finance together, provide collective guarantees or even set up their own financial body. The threat of expulsion from the cluster ensures that promises are kept, which allows the network to overcome shortcomings in the legal system (Južnik Rotar, Kontošić Pamić & Bojnec, 2019). Frequent interaction with financial authorities, as well as the role that reputation plays in the cluster, can greatly increase confidence between firms and financial institutions and thus make it easier to get loans and lower rates of interest.

According to a survey upon French SMEs in 2010 (KPMG, 2012), trade credit remains the main source of financing corporate cash flow in France. Self-financing is the first source of investment funding (40–45% of cases), followed by bank loans (34–38% of cases). The average corporate debt ratio for SMEs is 88.6%: the debt ratio is below 52% for half of SMEs, whereas it is above 158% for a quarter of them. In 2009, the median weight of equity in the balance sheet of SMEs was 42%. Three-quarters of SME managers declare being reluctant to open their capital to outside investors, in fear of losing their independence. Very few SMEs access the financial market: out of 135,823 French Small and midsize firms (excluding micro), only 574 were listed in 2010. As such credit is the main source of financing for the majority of SMEs in France.

As much as it is reported that SMEs in developed economies are likely to receive financial assistance from the formal financial institutions sector, cases of limitation in financial accessibility are still reported. The reluctance of the banking institution to finance the activities of the SMEs have been reported in most economies of the world. According to Ramachandran and Yahmadi (2019) the profitability of the banks is dependent on the effectiveness and efficiency of the borrowers in repaying their loans. The ability of a borrow to repay a loan is determined by the amount of interest they can pay as well as the nature of the security provided to secure the loan (Amoah & Amoah, 2018). In most instances, the entrepreneurs venturing in the small and medium sized enterprises are deemed to be unable to repay such loans with a relatively high interest, explaining the reluctance of the banking institutions to offer significant priced loans to the SMEs.

Accessibility of Finances

Accessibility to finance is considered the most constraining feature of the SMEs business environment. According to Beck and Kunt (2006) the accessibility and cost of financing is rated by more than 50% of the SMEs in the globe as their major growth constraining factor. Majority of the SMEs in the developing countries have indicated that limited access to finance, high tax rate and macroeconomic instability are the major factors that hinder the SMEs from significant growth. However, Južnik Rotar,  Kontošić Pamić and Bojnec (2019) have reported that as much as political instability is a critical factor that affects the growth of SMEs, financial constraint is the most significant factor that hinders the growth of most SMEs in the developing economies.

Smaller firms in the developed economies have also reported higher financing obstacles in relation to the large and medium-sized organizations. Beck, Demirguc-Kunt, Laeven and Maksimovic (2006) in their study reported that smaller organizations in the developed economies reported higher financing obstacles even after controlling for other factors likely to affect the operations, performance and growth of the firms. Similar sentiments have been reported by Biney (2018) who indicated that the probability that a small firm or medium-sized organization will indicate that financing is its major obstacle is 35% higher than the chance that a large firm will report the same.

The higher financing obstacles reported by the small organization is also evident in their financing patterns. Halberg (2018) in their research explored the possibility that the firms will seek for loan and determine their effectiveness in repaying the acquired loans. The findings of the study revealed that while small forms finance less than 10% of their investments with finances from the banks large organizations finance more than 20% of their investments with bank credits (Halberg, 2018). Consequently, large firms have a strong advantage in trade and development in relation to the small firms. In fact, Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) have reported that small and medium-sized firms seem to finance their investments with informal finance and equity than the larger forms. Since these sources of finances are overly unreliable, small and medium-sized fail to have access to finances in most cases.

Both in the developed and the developing economies, SMEs have been repotted to have limited access to formal sources of finances. Most of the cross-country firm level surveys conducted to ascertain the financial and institutional development of the organization, indicates that SMEs across the different economies have limited access to finance. The findings of the survey done by the World Business Environment Survey (WBES) as reported by Beck and Demirguc-Kunt (2006) indicates that over 10000 firms across 80 countries of the world reported that they have limited access to finances from the banking institutions in their economies.

The limited access to finances for the SMEs can be as a result of credit rationing by banking institutions. According to Stiglitz and Weiss (1981), SMEs are likely to suffer from credit rationing which means that the organizations are unable to get as much credit as they want although they are willing to pay the going market interest rate and meet other conditions set by lenders. This scenario is probable in various markets based on the fact that excess demand would lead to a price increase, that in turn increases the supply and reduces demand until an equilibrium between the two is achieved.

In Europe particularly Italy majority of firms accounted more than 95% are SMEs. While the proliferation of small-scale enterprises has often been pointed to as one of the reasons for Italy’s economic success, the limited types of external funds available to Italian companies make them prone to financing constraints. In Italy, once internal funds are depleted, the banking channel is often the only way for Italian SMEs. In fact, capital markets in Italy are relatively undeveloped compared not only to those in the USA. Therefore, the Italian stock market is not an important source of finance in Italy. Very few Italian companies trade publicly, not even companies that are quite large. Although its central role in the national economy, the Italian banking system was until recently state owned, heavily regulated and scarcely competitive. Up to the early 1990s, the main features of the banking industry in Italy were the results of the regulation introduced in 1936 in order to avoid banking instability Many restrictions were laid down 27 on banks’ activity among which the total control upon entry and exit in the industry, as well as on branching decisions.

In the credit markets, burrowers may be unwilling to pay the interest rate and increase the supply of loans even if there is unsatisfied demand. The concept of rationing can be best understood by understanding that credit rationing are information asymmetries between lenders and borrowers (Mancusi and Vezzulli, 2014). Information asymmetries may prevent lenders from observing the true nature of borrowers; they may also prevent lenders from influencing the behavior of borrowers once the credit contract is signed. In principle, lenders could raise the risk premium on loans, but doing so may increase the probability of default by attracting riskier borrowers (adverse selection) and/or by encouraging riskier behaviour of borrowers (moral hazard).  Since adverse selection and moral hazard could cause the lenders’ expected payoff to diminish when raising the interest rate, they may refrain from raising rates beyond a certain level even if this means not fully satisfying the demand for credit (Mancusi and Vezzulli, 2014). The negative welfare effects of such credit rationing are underinvestment and lower growth.

Focusing on SMEs in France, previous scholars have reported a number of challenges faced by the small and medium-sized organizations in their operations. Besides the challenges encountered in accessing and selling to the foreign markets, financial capital is another obstacle that hinders the SMEs from achieving a maximum growth. The 2018 report by Statista, that explored the challenges of SMEs in France, outlined the most significant challenges that the organizations face (SME Banking club, 2019). According to the report, attracting customers is the most significant challenges faced by the SMEs in the region. This is followed with the difficulties to increase their revenue and improve their profitability. Developing new products through innovation is also a major challenge that is faced by the SMEs in France. The insignificant challenges faced by the SMEs in the region, include the issues of rules and taxation, suppliers and other government regulations.

From the findings included in the Statista report, it can be deduced that major challenges are linked to the capital performance of the firms, justifying the assertion that the SMEs in the region have limited access to finance. As much as it is observed that the financial situation of the SMEs and VSEs have improved since 2010, it is still evident that their capital base cannot promote their growth and development to the desired level (Statista 2019). While the SMEs and the VSEs have struggled to fight the intense competition posed by the larger firms, access to credit for these kinds of organizations have remained a daunting task. Consequently, they have not been able to expand their business through introduction of new products or innovations, contributing to a retardation in their financial performance overtime.

The Role of Banking Institutions in Promoting Entrepreneurship

From the review of literature, it can be deduced that access to formal finances is a major factor that affects the performance and growth of SMEs in an economy. Adequate finances have a positive impact on entrepreneurship as it promotes the development of new start-ups as well as the growth of existing small businesses. According to Siekei, Wagoki and Kalio (2013) the role of banking institutions in the promotion of entrepreneurship is manifested in three main ways, through the provision of credits, loans and financial trainings.

Banks Credit

It is reported that access to credit enhances the economic activities and performance of SMEs. However, most SMEs are financially excluded and access to the formal financial institutions such as commercial banks is limited. The issue of financial rationing by the financial institutions have hindered most of the SMEs in different parts of the world to access the credits they need.

Different reasons have been presented to explain why smaller forms are highly vulnerable to credit rationing. According to Mancusi and Vezzulli (2014) one of the notable reasons that SMEs will face credit rationing is that such kinds of businesses have limited access to the capital market. As such, the SMEs in most cases rely on the credit market as their source of funding, for all the activities and programs (Kremp, and Sevestre, 2013). In the event that the internal funds of the SMEs are exhausted, then they are only likely to consider the credit funds as their source of capital for business operations and investment purposes. Secondly, Kremp, and Sevestre (2013) reported that the SMEs are victims of asymmetric information that is evident in the credit market. According to the scholars, such information asymmetry may lead to credit rationing.

From another, perspective Mc Namara, O’Donohoe and Murro (2020) reported that many SMEs have less credit history. These firms also face less rigorous reporting requirements and, as a result, information on them is less easily available. More essentially, small firms may be more reluctant than large firms to fully communicate and talk openly about their business structure, growth opportunities, and strategic orientation (Kremp, and Sevestre, 2013). Most SMEs are family-owned businesses, most of which are sometimes tentative to make their ownership structure public. Such kinds of business will not disclose their financial status, barring them from having access to the financial credits offered by the formal financial institutions (Mancusi and Vezzulli, 2014). Finally, it is reported that another reason why smaller firms could be particularly vulnerable to credit rationing, and may not access credit from the commercial banks is that they often have less collateral that could safeguard creditors from the damaging effects of adverse selection and moral hazard in the event that they fail to repay the loan.

Credit rationing apart, external finance tends to be more expensive for small firms than for large ones. An obvious explanation is that fixed costs of lending – which are not proportional to the size of the loan (e.g. administrative costs and the costs of collecting information about the borrower) – inevitably make small loans more expensive than large loans (Kremp, and Sevestre, 2013). One could also argue that small firms are, on average, riskier for the lender than large ones and, thus, need to be charged a higher interest rate. But the argument is not as straightforward as it appears at first sight. It is true that small firms may have a higher probability of failing; in particular, start-ups have a high probability (more than 50 percent) of perishing within their first five years and – consequently – small, young firms are rightly perceived as riskier (OECD 1997). But it is also true that simply comparing small and large firms individually is inappropriate since credit risk can partially be diversified away for smaller firms. A well-diversified basket of many small borrowers could be less risky than a portfolio of the same size comprising loans to large customers.

A more routine explanation for fairly high costs of SME lending is a likely lack of competition among creditors, which permits them to charge interest rates that are in excess of what the underlying credit risk requires. In general, it is plausible to argue that SMEs have fewer options when raising external finance, and this makes them depend more on a limited number of financial institutions (Kremp, and Sevestre, 2013). But there is also a specific dimension: small businesses are usually entirely dependent on the local bank market whereas large firms can shop around on global financial markets. In this context, it is worth noting that there is evidence for a clear relationship between bank size and SME lending, with large banks devoting a lesser proportion of their assets to small business loans (see, among others, Berger et al. 1998). In External finance tends to be more expensive for small enterprises than for large ones.

Recent financial research (Degryse and Ongena 2005; Petersen and Rajan 2002) highlight the importance of the availability and pricing of bank loans. In particular, Petersen and Rajan (2002) document the importance of distance in the provision of bank credit to small firms, especially in a country where the problems of asymmetric information are substantial. Pollard (2003) suggests the need of contextualizing firm finance, analyzing how different geographical configurations of financial institutions affect the access to credit for firms operating locally. In general, it is suggested the idea that banks operating locally have more knowledge and control about local firms and entrepreneurs (Alessandrini ang Zazzaro 1999).

According to Titman et al.(2003), a principal source of the financial constraint, influencing capital-structure, may be the existence of asymmetric information and the cost of contracting between companies and potential providers of external financing. Problems of financial constraint are potentially high in presence of a poorly developed financial system. A well-developed financial system can facilitate the ability of a company to gain access to external financing, providing cheaper finance to worthy companies (Guiso et al. 2004).

In addition (La Porta et al. 1997, 1998; Beck and Levine 2002). Suggested to account for the role of the judicial enforcement in shaping the operation of financial systems and affecting financing decisions. Specifically, the judicial enforcement is important, because the regulations governing the financial system work in the interest of investors, protecting creditors only to the extent that the rules are actually enforced. Due to the risk of default and the difficulty to get back the liquidation value of the collateral, enforcement affects the ex-ante availability of agents t

For SMEs, it’s very difficult to get loans to expand the business. Similarly, it is a daunting task for entrepreneurs in different categories to access credits for starting up new businesses. The limited access to credit financing is attributed to the inability of most SMEs to repay the loans within the stipulated time. The absence of accurate financial information about the status of a firm, also bars the SMEs from accessing the needed funds. According to Sacerdoti (2005) the absence of finances to SMEs in Sub-Saharan region is attributed to their inability to avail accurate financial information on their financial status. The absence of appropriate and accurate company registers has also made it difficult for the banking institutions to offer credit to the SMEs. Similarly, in the developed economies, the inability of the SMEs to access financial credits from the commercial banks is attributed to their weak financial base, as well as the lack of appropriate disclosure of the financial position of the company.

Due to their small size and lack of adequate operational resources, most SMEs in the developed economies fail to formulate detailed financial reports that showcase their financial performances over time. Consequently, the commercial banks, that are considered the formal lenders of finances to business in the economies, are unable to gauge the financial performance of the companies as well as determine their ability to repay the given loans. The results are reluctance of the banks to offer financial credit to the SMEs.

The availability of financial credit to the SMEs in France, has also been curtailed by the failures of the companies to meet the requirements set by the commercial banks. As much, it is reported that the provision of credit to most small and very small organizations in the region has improved significantly since the year 2010, it is important to note that a majority of the SMEs operating are yet to access financial credit they need to expand their operation. This assertion is however based on previous studies that were done more than 10 year ago, presenting the need for more recent studies that will determine whether the access to financial credit for the SMEs in France have been enhanced or reduced.

Unsecured loans

According to Ogujiuba et al (2004) the predominant credit facility available to small and medium-scale business in different economies. Bank overdraft and short-term loans, as well as asset-based loans are labelled as the types of unsecured loans that available to the SMEs. There is scarcely no firm in the world that does not use overdraft facilities to manage its way through business cycles. Banks prefer overdrafts and short-term loans for the simple reasons that, they are easily rolled over, they attract almost market interest rates and they are fully collateralized. Many firms always rely on overdraft to finance long- term investments. However, the availability of the unsecured loans has remained limited to the SMEs.



















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