*ENTERPRISE FINANCING, EMPLOYMENT GENERATION AND
ECONOMIC DEVELOPMENT
Candauda Arachchige Saliya
UUNZ Institute of Business
Auckland, New Zealand.
Mobile: 64 27 345 0249
Fax: 64 9 921 9990
[email protected]
Abstract
This research paper seeks to show how the employment generation, economic
development and certain financing decisions are mutually reinforcing and co-integrated
and, why it is happening? The methodology used in this research is case study research
methodology using critical theory approach. The research findings show how does the
powerful social class, which controls financial capital in Sri Lanka, follow preferential
financing policies under the façade of nationalism or patriotism and social responsibility,
to protect and strengthen their own socio-economic power base, while neglecting credit
applications of potential entrepreneurs from powerless class. These cases are from one
private bank in Sri Lanka. Anonymity was necessary to protect the real cases therefore,
some important background information had to be eliminated. The paper has important
implications for policy makers and promoters of Micro, Small and Medium size
Enterprises. Awarding the Noble Peace Prize 2006 to Prof. Muhammad Yunus, for his
Grameen Banking concept in Bangladesh shows that there is a need for finance to be
made available to the poorer levels of society and that the banks are ignoring the
potential of lower class enterprise. Therefore, the research findings indicate the need to
place an emphasis on some radical structural changes in the financial capital mobility
system to promote enterprises and employment generation to eradicate poverty in Sri
Lanka and beyond. The research in this paper is original because it has, for the first time,
critically analysed the business financing culture in Sri Lanka. Also the paper attempts
to fill a gap in the literature pertaining to the role of credit weapon and its co-integration
with entrepreneurship development in a country.
Keywords: Financing decisions, Capitalism, Entrepreneurship, SMEs, Sri Lanka.
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Introduction
Entrepreneurship promotion and enterprise development have been commonly identified
as the main sources of employment generation and economic development by most of
the development-policy formulators. These policy formulators include governments,
academicians as well as international development agents and experts (Bank of England,
1999; The World Bank, 1987). Enterprises, especially small and medium sized
enterprises (SMEs), provide a solution to the unemployment/underemployment problem
and therefore, improve the economic well-being of people. This research was initially
motivated by the researcher’s interest in finding out why developing countries like Sri
Lanka do not produce adequate successful enterprises and generate sufficient
employment opportunities so that they can achieve their target level of economic
development faster and steadily.
The theoretical framework developed for this research is primarily based on critical
theories stemming mainly from Marxism. The research method used here is a case study
research method because, a study of individual elite political identity can be used as a
lens to examine larger political processes, as identities are aggregated in political power
and culture in which they are embedded (Hite, 1996). Most research on practical issues
are case studies and some are reconstructed from evidence gathered by the researcher
because they are relevant, interesting, politically ‘hot’ or even misunderstood (O'Leary,
2005). The subunits of analysis of the cases were identified as incidents and events taken
place, leading up to decision-making (Hooper, 2001). In the process of theorization these
subunits of analysis collectively explain a macro level holistic unit of analysis; the
‘powerful social class’ which significantly possesses the power of controlling the
financial capital in Sri Lanka.
The significance of this study is two fold, first it critically analyses and documents
prevailing credit culture and systems in practice as against the rules given in so-called
‘credit policy manuals’ of banks. Second the research findings may help the policy
formulators of the developing countries to understand existing credit system and make
necessary reforms if they want to develop their economies and to distribute the benefits
to all people fairly and justly.
The following issues were identified as the major limitations of this research report.
First, to evaluate the effectiveness of the financing decisions observed in these case
studies, availability of post-event information was limited to published data and to the
responses of the research participants, as the researcher left the bank in 2003. Second, all
the cases belong to one private bank in Sri Lanka, however, according to Hooper (2001),
“validity of the explanations or theory derived depends on the logic of the analysis not
on how typical the cases may be” (p. 1) and on the other hand Gluckman (1961) argues
that “clearly one good case study can illuminate the working of a social system in a way
that a series of morphological statements cannot achieve” (p. 9 cited in (Mitchell, 2000).
Third, because the cases are from Sri Lanka, where socio-economic & political
backgrounds are different, the reader might feel unfamiliar to some of the situations.
Then, anonymity was necessary to protect the real case and its real participants,
therefore, the names used in this case are fictitious and therefore, some important
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background information had to be suppressed. Finally, only a summery of case studies
could be provided in this report to shorten the length of the paper.
The researcher was unable to find related research in Sri Lanka, although this likely
increased the originality of this research topic, it also prevented the researcher building
on, and comparing this research findings with previous research findings regarding this
research topic.
Literature review and research propositions
The enterprise financing is playing a significant role in providing necessary financial
capital for enterprises to start, grow and achieve economies of scale. Also, preliminary
investigation revealed that bank credit decision makers preferentially facilitate the
powerful demographic groups and ignore the less privileged groups of society. Certain
credit decisions, which are not based on principles of credit evaluation but on other
motives of decision makers, appear to work not only against enterprise development and
employment generation, but also against general economic development in any country.
Small and medium enterprises (SMEs) represent an important engine of economic
growth in any country (Cavalluzzo, Cavalluzzo, & Wolken, 2002; Lauder, Boocock, &
Presley, 1994). The contribution from these businesses are significant to the tune of sixty
or seventy percent of both the gross domestic product (GDP) and employment
generation of a country in general (Bank of England, 1999). Many researchers were of
the view that the lack of financial capital is the main reason for most business failures
(Bank of England, 1999; Dunn & Cheatham, 1993; Ivy, 1997) but there could be other
contributory factors as well. More importantly, these researchers argue that access to
credit is limited, especially to the disadvantaged and/or poor group of society. The
Governor of the Bank of England says,
A particular problem at this end of the scale is access to start-up or early-stage finance
for disadvantaged groups in poor-neighborhoods (1999, p. 207).
It is also argued that budding entrepreneurs from different demographic groups do not
have similar opportunities in accessing finance; some groups have less access while
other groups have more access to finance capital. Cavalluzzo et al. quote Bates (1973 &
1991) and explain this theory as follows;
In order to facilitate that growth, those businesses often turn to institutional sources for
credit. It is a concern, therefore, that a growing body of evidence suggests that owners of
small businesses from some demographic groups may have less access to institutional
financing (Bates, 1973; 1991; Cavalluzzo & Cavalluzzo, 1998) (p. 641).
Therefore, it is evident that, some demographic groups are discriminated in facilitating
credit because they are small, poor and disadvantage meaning that; some other
demographic groups are privileged in accessing credit because they are big, rich and
powerful.
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‘Workshop on the Challenges in SME Financing’ held in Sydney in 1999 discussed
international experiences principally from Australia, the UK, the USA and New
Zealand. It revealed there were not adequate finance providers for SMEs. Most of the
research papers presented in this workshop were critical of the inability to obtain finance
for small or budding enterprises. They criticized banks’ dominating role in providing
finance to SMEs because there are very few lenders who facilitate them (Whincop,
2001). Participant researchers in this workshop also challenged that; some bankers lack
of fundamental knowledge about credit evaluation and posed questions/statements such
as:
Do bankers always know best? (Dunn, Cheatham, & Cheatham, 1991) p. 1);
Are the banks doing enough for small business? (Chadwick, 1982) p. 1);
30 percent of bank loan officers do not understand appropriate financing (Dunn &
Cheatham, 1993) p. 3).
The Nobel Peace Prize in 2006 was awarded to Prof. Muhammad Yunus, for his role in
promoting financial services to the poor, under the concept of Grameen Banking in
Bangladesh. This highest level of recognition of Prof. Yunus’s effort for facilitating
disadvantaged social groups of the society shows that there is a need for credit facilities
to be extended to the poorer levels of society and that the banks are ignoring the
potential of lower class enterprise (The Economist, 2006). However the questions: “How
and why do bank loan officers act like this?” remains unanswered.
In seeking answers to the above questions: ‘How and why do bankers make such credit
decisions?’, there are arguments that credit systems are part and parcel of a total socioeconomic mechanism which, according to Marxism, is structured for continuous
accumulation of capital to its owners. Marxism is a socio-economic theory which tries to
uncover the way in which certain groups gain power in society and then hold that power
for their own benefit (Moore, 1994). According to Marx, the bourgeoisie are the owners
of the means of social production and employers of wage labour, control society and
construct values and social relationships in their own interests (Marx & Engels, 1848). It
is worth noting that, as De Brunhoff (2003) points out,
according to Marx (1867, p. 626) the ‘Credit System’ including bank loans is a terrible
weapon in the battle of competition, and is finally transformed into an enormous social
mechanism for the centralization of capital (p. 144).
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According to this theory, bankers generally prefer to lend to people who already have
capital, so that capitalists can compete more effectively while eliminating new entrants
to the market. Such lending approaches could act as road blocks for enterprise
development and aggravate unemployment problems especially in developing countries.
Moreover, this chronic unemployment/underemployment problem could contribute
towards a disproportionate delivery of economic well-being, hampering the economic
development. Prominent economists (for example; Alan Greenspan, Muhammad Yunus,
William Pesek) openly advocate the importance of state intervention and often treat
credit as an important tool in dealing with poverty. Yunus says that, “credit is a human
right and poverty is created by social systems” (2006, p. 27) while Pesek suggests that,
“if developing nations are to become mature economies central banks must do their
jobs” (Pesek, 2006, p. 15).
Therefore, the link between the enterprise financing and employment generation is
established as the foundation of this research. But, how such enterprise financing works
discriminatorily, what methods are used to justify such decisions and what motives and
social factors drive the decision makers in such decisions, are still to be researched and
explained.
In light of the above mentioned theories for the possible existence of discrimination in
financing businesses by banks, the research interest was narrowed down to investigate
how and why a certain powerful group in a society could have more access to credit than
that of the less powerful group. Similarly, how and why the credit decision-makers
facilitate credit applicants from the powerful group but deny the credit applications from
disadvantaged group of the poor class. These two questions are two sides of the same
coin; how and why certain enterprise financing processes are discriminatory in nature.
Mutual relationships between variables could generally create a reinforcing-mechanism.
This dynamic nature of variables, which are complementary to each others’ survival and
enhancement, is called a co-integrated function so that, it could be inferred that certain
financing processes and the economic development in Sri Lanka are mutually
reinforcing and co- integrated. It is carefully noted that, making such an inference does
not mean that other influencing factors such as terrorism, war and corruption etc. do not
exist or are unimportant or irrelevant for the present status of the economy in Sri Lanka.
A substantially prolonged debate is apparent among many economic, social and political
theorists, psychologists, anthropologists and other various scholars (for example;
Abramovitz, 1986; Baumol, 1986; Firebaugh, 1999; Khan, 1979 Korzeniewicz and
Moran, 1997; Kuznets, 1955; 1972; 1979; Lewis, 1966; Maddison, 1983; Ranis, 1972;
Rostow, 1990) on development theories. The experts have developed and been
redeveloping various theories to explain the situation and explore the crux of the matter
with a view of finding a solution to this underdevelopment problem. Access to
productive knowledge, access to capital markets, population stress, lack of natural
resources, quality of human capital, culture, religion, ethics, quality of institutions &
policies, lack of leadership & vision, power-hungry leaders or nations, imperialism or
colonization, globalization, bureaucracy, corruption (Gray, Owen & Adams, 1996),
familial cronyism, lack of corporate governance and others are most popular among the
5
numerous causes proposed. In this light, it would be timely to investigate how enterprise
financing might contribute towards underdevelopment and unemployment in a country.
Literature on decision-making behaviour
According to scholars of behavioural sciences such as social-psychology (for example
:Barry, 2001; Cialdini, 1993; Kipnis, 2001), sociology (for example: Molm, Schaefer, &
Collett, 2007; Pearce II & Robinson Jr, 1987; Peay & Dyer Jr, 1989) decision makers
are influenced by symbolic gains and feelings such as achievement, being powerful or
successful, and even by benefits of reciprocity. Molm, Scaefer and Collett argue that
“behavioral preferences are governed primarily by the instrumental value of exchange,
while sentiments of trust, affective regard, and solidarity are strongly influenced by the
symbolic value of constant reciprocity” (2007, p. 199).
According to the social responsibility concept (Peay & Dyer Jr., 1989; Pearce II &
Robinson Jr., 1987; Davis, 1967) in our society, business is influenced by all other
groups in the system, and business in turn, influences them. Social responsibility
theorists further stress that the power-responsibility equation clarifies managerial
obligations. Therefore, business in the long run, to maintain its position of power, must
accept answering for its responsibility to the whole society. “The Social power holder is
willing and able to help others feels powerful and capable of accomplishing things on
their own” (Peay & Dyer Jr., 1989, p. 49). However, this ‘willingness to help others’ is
only a mere feeling of being powerful and is not convincing in the business point of
view.
Further, Ribot and Peluso (2003) developed a theory based on the concept of ‘access’
which was formerly defined as a mere ‘the right to benefits from things’. They argue
that the concept of access could be broadened to ‘the ability to derive benefits from
things’ based on ‘a bundle of powers’ instead of property’s notion of a ‘bundle of
rights’. This formation of power includes a wide range of social relationships, methods
and processes that enable various actors to derive benefits from resources (Ribot &
Peluso, 2003). According to this theory, the enterprise financing decision-makers’
ability to make decisions depends on their relationships with the decision-seekers and,
also the methods and processes they used to make such decisions. Ribot and Peluso
further stressed that, “access to capital in the form of credit is a means of maintaining
resource access” (2003, p. 165). And they further say that,
Some actors in these webs of social relations control and maintain access by controlling
single strands or bundle of powers. Some actors pool their powers, forming bundles of
owners, workers, or beneficiaries acting in concert to assert greater control or to
maintain their resource access (Ribot & Peluso, 2003, p. 173).
The Sri Lankan culture is that the bank officers and the customers are very well prepared
to grab and resort to arbitrary methods. Also, when it comes to a lower or middle level
decision-making, it might not be appropriate to connect those fevered-decisions to ego,
self esteem or even social responsibility. However, these decision makers too enjoy
6
certain level of social power, privilege or inclusion in their own spheres and could still
be influenced by monetary and other benefits and advantages as well.
Literature pertaining to corruption (for example: Aguilera & Vadera, 2008;
Jayawickrama, 2001; Moran, 1999) and patriotism or ‘national interest’ (Shin &
Schwartz, 2003) was also reviewed and found useful in understanding the behaviour of
decision makers. Organizational corruption is defined as “the crime that is committed by
the use of authority within organizations for personal gains”(Aguilera & Vadera, 2008,
p. 433 [italics original]). According to Aguilera and Vadera, personal gains include not
only individualistic benefits but also corporate benefits such as improved profitability.
However, these corporate level collective gains could deliver individualistic benefits
such as job security in the long run. Aguilera and Vadera (2008) suggest three types of
organizational corruptions (procedural, schematic, and categorical) based on Webber’s
three ideal-types of authority (legal-rational, charismatic and traditional), different types
of motivation (individualistic, collectivistic and relational) and three methods of
justification (rationalization, socialization, and ritualism), however, they admit that,
We realize that no organization has a particular authority in the pure form, nor will its
members follow a pure motive or justification method to engage in a pure corruption
outcome (p. 444).
On a different track all these explanations, according to Marxian analysis (for example:
Gray, Owen, & Adams, 1996; Saad-Filho, 2003), are superficial interpretations of
structural nature of capitalism, it does not explain sensibly why do these power holders
want to maintain their resource access?, and whether their acts are really driven by
motives such as personal gain, organizational benefits, patriotic attitudes, national
interest or social gain.
Background
The Central Intelligence Agency (CIA) Fact Book condenses Sri Lanka’s political
history into a single paragraph as follows;
The Sinhalese arrived in Sri Lanka late in the 6th century B.C. probably from northern
India. Buddhism was introduced beginning in about the mid-third century B.C., and a
great civilization developed at the cities of Anuradhapura (kingdom from circa 200 B.C.
to circa A.D. 1000) and Polonnaruwa (from about 1070 to 1200). In the 14th century, a
south Indian dynasty seized power in the north and established a Tamil kingdom.
Occupied by the Portuguese in the 16th century and by the Dutch in the 17th century, the
island was ceded to the British in 1796, and was united under British rule by 1815. As
Ceylon, it became independent in 1948; its name was changed to Sri Lanka in 1972
(Central Intelligence Agency, 2007, p. 1)
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Sri Lanka has 65,610 square kilometres (including 2,805 Sq. Km. of inland water). The
population was 3.5M a century ago in 1901 and now it is reported as 20M. Beginning
with a land-based capitalist structure in the 1950s after gaining the independence in 1948
Sri Lanka followed mixed economic policies of capitalism and socialism. In 1977, a
capitalist-centred (right-wing) government revolutionized Sri Lankan politics, marking
the end of the state-centred economic system. Stimulated by IMF and World Bank
initiatives, public enterprises were seen as economic burdens and the government sought
a more competitive market environment and privatization.
Sri Lankan banking environment
Arbitrary/informal decision-making is encouraged in Sri Lanka when standard systems
and procedures are not effectively implemented in an organization. But financial
institutions, which are closely regulated and supervised, generally have very well written
policy and procedure manuals in accordance with the international standards as per the
requirements of the Basle agreement (Basle agreement is the set of consensus agreed by
the international banking practitioners on prudent accounting and reporting of financial
institutions). Those manuals are regularly updated especially for delegated authority
levels in keeping with changes in hierarchical positions of decision-makers and
technological advancement.
However, Sri Lankan Banking culture, which is heavily, influenced by traditional
arbitrary methods used in the society in general, known as too lenient towards rule
breakers due to corruption and favouritisms. To reap the benefits of proper systems, not
only they should be clearly defined with duties and responsibilities towards its clients,
owners and finally to the community, but also should be effectively monitored with
appropriate rewards, punishments and corrective actions. Therefore, mere
documentation or guidelines to follow the set rules will not serve the actual purpose of
setting up systems. However the people involved in the systems should make sure that
delivery of quality output is what most important to achieve the corporate goal of an
organization.
The Soft Bank, one of the largest privately owned listed banks in Sri Lanka, was very
strong in marketing customer deposits and it had some unique strengths. It was young
(Incorporated in 1989) and had a very young enthusiastic workforce, lead by a
prominent businessman in the country, backed by a large group. The advertising and
publicity campaign was very aggressive and the Soft Bank soon became a household
name all over the island. It expanded rapidly, opening 100 branches during the first 7
years. The customer deposit base was three times of that of SET Bank, which was also
incorporated in 1989. Soft Bank became the largest private bank in terms of the branches
and number of employees, and the second largest private bank in terms of customer
deposits and assets, by the end of the year 1996.
However, the profitability figures were poor having Return on Average Assets (ROAA)
of less than 1% and Cost to Income ratio of more than 70%, which was the highest
among private banks listed in the Colombo Stock Exchange. The amount of nonperforming loans (NPL) had risen to more than 20% of total loans. The Central Bank of
8
Sri Lanka severely warned the management several times and had set time frames to
address the issue immediately. The Chairman was worried about this situation and raised
doubts on the systems and the officers of the Bank. The market price of the Soft Bank
stock was also not performing in par with the industry average Price Earning (PE) ratio.
Research reports on the Soft Bank, published by most of the stockbrokers were adverse
with a recommendation to Sell or Hold, because of poor financials when compared to
the financials published by the peer banks.
Selection of cases
Three cases were studied for this research because the evidence from multiple cases is
often considered more compelling, and the overall study is therefore regarded as being
more robust (Herriott & Firestone, 1983). Further, several case studies in one inquiry is
advisable when the inquiry is about relationships between variables, rather than
generalization to a population (Woodside & Wilson, 2003). Out of the three cases
considered in this research, two cases are related to successful credit applications from
members of a powerful social class which supports the many theories discussed above;
financial capital was provided informally on preferred social norms because the
applicants are socially powerful or capable of reaching the decision maker. The other
case is a credit application from a member of a powerless class, where credit was denied
and, is also in line with those theories. The basis of selection of these cases is described
briefly in the next section.
After considering the boundaries, access to sites and scope of this research it was
determined that at least two cases should be selected; one to represent the formal
methods and the other to represent assumed informal methods. Since the scope of the
study is availability of financial capital to SMEs it was necessary to select cases to
represent both the medium and the small size enterprises. Also, to balance the
representation it is decided that at least one case should be from instances where the
credit was denied and one case should be from instances where credit was granted.
Therefore, it is concluded that maximum of three cases would be selected out of the
cases presented by the participants on the grounds explained below.
The questionnaires were sent repeatedly and answered comprehensively for three credit
decisions and out of them two decisions were made by the Chairman himself. The other
case was handled by the middle level credit decision makers of the bank. Another case
was composed by reconstructing the researcher’s personal experiences where the
decision maker was again the Chairman himself. Therefore, there were data available for
four case studies altogether as classified in the following Table 1.
Table 1: Classification of cases based on participants and decision making
Participants
Researcher
Participant 1
Participant 2
Decision maker
The Chairman
The Middle Management
Case I
Case II
Case IV
Case III
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The three credit applications; cases I, II & IV, which were handled by the Chairman,
were fully accommodated and credits were granted. Out of these cases only the first two
were considered for this research because of the typical nature of the cases. One of them
(case IV) was not considered because it had only limited link to economic policies of Sri
Lanka and it does not weaken the rigor of the research. The credit application, which
was not accommodated and credit was denied, was handled by the middle level decision
makers and was also considered for the research so that balanced representation is
enhanced. All three credit applications, which have been considered for this inquiry, are
typical in nature in the Sri Lankan context therefore represent the general credit culture
in Sri Lanka.
Summary of the case studies
The three long stories are condensed in the following Table II: Summary of the
Discussion and Analysis of Case Studies, to provide a holistic picture of the situation.
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Friendly. Quick.
Without formal evaluation.
Granted, over the table.
Sympathetic/patriotic
Negotiation
Decision
Explanation/
grounds
Without formal evaluation.
Granted, over the table.
Decision one: Formal. Granted
without authority, therefore, the
decision maker lost the job.
Decision two: Formal. Denied.
Formal. Dragged.
11
with Decision one: Personal benefits,
Enterprise promotion oriented. Quick.
Import protection? Protect foreign Big competitor penetrating into the
reserves. These automobiles were business.
Soared
relationship
refused to register on road worthiness between bank officers and the client.
& safety issues. Investment promotion
mechanism.
grounds Patriotic/nationalistic
Client was under the threat of
foreclosure and losing 30,000 jobs.
Highest single foreign exchange
earner.
Issues
Personal, both the credit decision Outside the bank at an investment Formal, within the normal banking
maker and the client are powerful forum, both the credit decision maker practices and formalities. Primarily
businessmen.
and the client are socially powerful.
role relationship.
Small level credit, a coming-up
janitorial-service ‘Superclean
Enterprise’ struggling with loss of
business and financing problems.
Approach
Medium level credit for a car
manufacturing company in Sri Lanka,
struggling with regulatory authorities
and financing problems.
Medium level credit for a garment
manufacturing company struggling
with lack of orders and liquidity
problems.
Case Study (III): Mr. Silva
Project
Table II: Summary of the Discussion and Analysis of Case Studies
Case Study (I): Mr. Tony
Case Study (II): Mr Yousef
Justification
with egoistic and/or any other egoistic and/or any other motive(s).
motive(s).
Prevailing systems are not good
Prevailing systems are not good
12
error rectifying. Decision two: Rigid
application of rules.
The case studies show that the informal lending takes place, when the decision maker
had; (a) an unchallenged authority and; (b) influenced by motives such as ego, self
esteem or favouritism.
The case studies also discover that the informal financing will not occur just because
of; (a) benefits to the bank and/or decision maker, or (b) the personal relationships or
gratifications, (c) extra liquidity position of the lender or (d) Patriotism/Nationalism
or social responsibility. But these factors may have had an impact in influencing the
decision makers.
The case studies show that, when the decisions were made at the highest level, the
informal financing decision might have been made as a result of a combination of
social attributes such as social power, influence, inclusion and prestige, individual
traits such as self-esteem, ego, and individual aspirations. Marxian analysis argues
that these individual traits are super structural. The structure under review is classbased capitalism and therefore, capitalists favour their fellow capitalists, as evident in
this research.
The discovery of case study (III) too is that, when the informal decision making was
involved at the middle and lower management levels, they might have been made as a
result of rewards expectancy on performance and/or reciprocation expectancy from
the parties involved. On the other hand it was observed that Mr. Silva is powerless,
lacks social network to reach the top management of the Bank. Also, and Superclean
is a small enterprise, and therefore, it was ignored.
The findings of this research have been theorized accordingly by establishing clear
relationship between certain enterprise financing methods and socio-economic power
of capitalist class in Sri Lanka. Marxist theory is known as the best fit conflict/critical
theory to answer the question ‘why’ the capitalist class in a society always protect
their own class. The important element of this reasoning is identified as ‘power
strengthening’. This research shows ‘how’ and what methods do they use to
strengthen the powerful social network? In the name of ‘globalization’, sophisticated
capitalists with neo liberal beliefs often use masks such as ‘Nationalism’, ‘Social
Responsibility’ to maintain the capitalistic socio-cultural structure which, in Marxian
analysis, is detrimental to economic development of a country. Also the impact of
such systems goes beyond the boundaries of countries through ‘globalization’.
Conclusions
Arbitrary/Informal financing methods, which is currently in operation within the
formal banking system in Sri Lanka, mostly driven by social power with or without
legitimate authority vested with the decision maker. In addition, personal
characteristics and traits such as patriotism, ego, prestige and aspirations of the
decision maker are also playing some roles in making decisions but they do not seem
important. Lack of support from the government in developing the SME sector seems
to be having significant impact on the formal banking systems pushing decision
makers for informal decisions with regards to financing micro and small enterprises.
These forces collectively influence informal decision making process especially when
the organizational structure is weak. These factors are summarized and presented in a
model illustrated in the Figure I: Arbitrary Credit Decision-Making Model below.
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14
Figure I: Arbitrary Decision Making Model: Combined Influence of Individual,
Organizational, Political and Social Environmental Factors on Informal Decision
Making in Formal Banking System in Sri Lanka (DM=Decision Maker)
GOVERNMENT POLICY ON SME DEVELOPMENT
O
E
R
N
G
V
A
I
N
R
I
O
Z
N
LACK OF
WEAK
BOARD OF
DIRECTORS
LEGITIMATE
AUTHORITY FOR
DECISION MAKING
SPECIFIC
GUIDELINES &
PRIORITIES FOR
SME.
DEVELOPMENT
WEAK
ORGANIZATIONAL
STRUCTURE/SYSTE
MS
ABILITY TO BREAK
RULES
PROPENSITY
TO MAKE
INFORMAL
DECISIONS
A M
T
E
I
N
O
T
UNPROFESSIONAL
PROCEDURES
ACCOMADATION OF
INFORMAL REQUESTS
NAL
S O C I O- E C O N O M I C
PATRIOTISM
PRESTIGE
EGOISM
PERSONAL
ENTERPRISE
FINANCING
DECISIONS
POWERSTRENGTH
ENING
GRATIFICATIONS
DECEPTION
SOCIAL
RESPONSIBILITY
ENVIRONMENT
The findings of the case studies barely support the theoretical perspectives based on
socio-psychological grounds. When the informal decisions involved the decision
makers at the highest level in the bank, it is more likely that the decision maker is
influenced by the motive of favouritism (power-strengthening) coupled with the need
to achieve esteem needs (Thoits & Virshup, 1997) rather than by social responsibility
(Davis, 1967). But when the informal decision is involved the decision makers at the
middle level of the hierarchy of the bank, it is more likely that the decision makers are
influenced by reciprocation or debt (Barry, 2001), and motivated by rewards
expectancy in weak organizational systems (Walton, 2004).
Based on the evidences, it could be generalized that, there is a tendency to make
preferential financing decisions when the credit applicant is socially and economically
powerful and, the decisions are made by abusing the legitimate authority overruling
the normal banking practices for credit evaluation. Exploring from Marxian critical
theory, Lapavistas (2003) explains the motive behind such arbitrary lending decisions
as follows;
Social power, privilege and inclusion in various activities are intertwined with
possession of money in capitalist society. Equally, lack of money translates into
powerlessness, deprivation and exclusion from several social activities for the
15
majority of the poor in capitalism. In capitalist society, successful participation in
social affairs depends less on a person’s abilities and skills, and more on possession of
money (p. 64).
Therefore, all individual, social-cultural and economic-political factors are
collectively directed towards protecting and strengthening the social power of an
affluent class of the capitalist or feudal society (Lapavistas, 2003). The economic
power afforded by money eventually leads to social power and in turn, social power
becomes the fundamental driving force of arbitrary/informal decision making in the
banking/finance industry in Sri Lanka. Then, because the powerless is ignored, poor
class is neglected. Therefore, opportunities are lost to the society/country as a whole.
On the other hand, because powerful class acquires more power through such
informal decisions, it can be concluded that, underdevelopment and preferential
lending processes are mutually reinforcing. This is illustrated in Figure II below.
16
Figure II: Illustrated Integrated Research Problem and Proposition with Research Conclusions
WHY ? Power-strengthening
YES
NO
CREDIT
HOW ? Using Masks
Money
WHY ? Avoid competition
Consciousness
Economic
Power
Social
Power
CYCLE
Propensity
ropensity to
make informal
decisions
FIGURE I
HOW ? Strict application of rules
REINFORCING
ROAD BLOCKS TO
EMPLOYMENT
GENERATION
AND ECONOMIC
DEVELOPMENT
This case research study provide solid evidence that, enterprise financing decisions
are made without following appropriate lending policies and procedures. These
power-driven decision-making systems not only restrict the availability of financial
capital for feasible projects but also blatantly deny credit applications of potential
enterprise and, create internal road blocks (Goulet, 2002) which are detrimental to the
economic development especially in the Less Developed Countries like Sri Lanka.
Therefore, the findings of this research strongly emphasize the need for radical
changes in the financial mobility system to remove road blocks of economic
development and to make the environment conducive for entrepreneurs to start, grow
and achieve economies of scale and generate employment opportunities towards
economic development in Sri Lanka and beyond.
Future Research
The findings of this research open many doors for further research and could be
extended to other developing countries as well. On the other hand, they may be
appropriate to conduct a quantitative research on to find: To what extent these types
of decisions are made and to assess their impact on the financial market/system of a
country? To what extent this inappropriate lending is correlated to the economic
development? To what extent these inappropriate lending decisions and socioeconomic power are mutually reinforcing? What is the correlation between socioeconomic power of individuals and their inclination to protect/strengthen the class net
work in the society? etc.
Further research of the findings could also be extended to find suitable systems,
policies and infrastructure frameworks to eliminate or minimize road blocks of
economic development of developing countries.
17
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