THE SOCIAL RESPONSIBILITY OF BANKS AND OTHER FINANCIAL INSTITUTIONS TOWARDS SMALL BUSINESSES By Dr Francis Neshamba Senior Lecturer in Enterprise Development Africa Centre for Entrepreneurship and Growth Nottingham Business School Nottingham Trent University, UK ABSTRACT This study examines the social responsibility of banks and other financial institutions towards small businesses with particular reference to Kenya and Tanzania. In these two countries and elsewhere, small businesses play an increasingly important role in the local economies. The sharp increase in the small business activities in recent years is found to be organically linked to the decline in large-scale firms and the public sector most of whom are retrenching their employees. Numerous studies have suggested that inadequate credit is one of the principle obstacles facing most small businesses in developing countries. Small businesses throughout the world share common features and similar problems. Many small businesses found relationships with banks or formal credit institutions increasingly uncomfortable. Most small business lending world wide is provided by personal savings, friends and relatives. This paper has attempted to discuss the "moral" responsibilities of commercial banks towards small businesses. The findings show that the main responsibility of the commercial banks is to balance the interests of their stakeholders while at the same time discharging their primary responsibilities. One of the important responsibilities for the commercial banks is to provide "adequate" financial services to small businesses and financial institutions and commercial banks are in an ideal position to do so. Key Words : stakeholders, financial institutions, social responsibility, profit maximisation, business community, shareholders, moral responsibility. INTRODUCTION There are conflicting opinions on whether financial institutions should take social responsibilities in the communities in which they operate and in particular, small firms or not. The first school of thought asserts that financial institutions (especially commercial banks), have responsibilities which go beyond making profits. Social objectives as well as those objectives dealing with economic performance, must therefore be given weight by business. It has been asserted that social responsibility begins where the law ends and that it must make a contribution towards the prosperity and stability of the community in which the financial institution or bank operates. It is a philosophy which shows that
2 management of a commercial bank will know and have empathy with the environment and the people in the community they serve. In the context of this paper, social responsibility can be described as the contribution, the commercial bank makes to the establishment, training, stimulation and assistance of the small firm to enable the business to grow, create more employment and thereby stimulate the wealth and levels of prosperity of the community as whole. The importance of the small business sector in Sub-Saharan Africa and its contribution to prosperity, cannot be overemphasised. RESEARCH PURPOSE The purpose of this study is to establish areas of social responsibility that financial institutions provide to small firms. The study was conducted in Kenya and Tanzania where a number of branch managers and assisting staff in commercial banks were interviewed to ascertain their role in providing social responsibility towards small businesses. This researcher was particularly interested in identifying the areas where commercial banks in the two countries have carried out some social responsibility towards small firms. METHODOLOGY The researchers decided to limit their research to 2 countries in Eastern Africa, namely : Kenya and Tanzania due to limited resources at their disposal such that it would have been logistically impossible to conduct a spatially more diffuse survey. Second, the above countries form what is, to our knowledge, one of the greatest concentrations of small-scale activities in East Africa. A total of 100 branch managers including managers in specialist positions and those responsible for proving credit to small firms, were interviewed. These comprised of 62 in Kenya and 38 in Tanzania. The purpose of the research was to provide some understanding on the extent to which banks and other financial institutions in the two countries provide social responsibility towards small firms. In fact, the degree to which commercial banks respond to the needs of small firms, form a central part of this study. It was felt that a questionnaire survey would have only allowed the researcher to gain a superficial and quantitative measure of the characteristics of the subject area and could therefore not provide a "tangible" picture of the social responsibility of commercial banks towards small businesses in the three countries. For this purpose, it was decided to undertake a small number of in-depth interviews with branch managers and other specialised staff members in the banks. LITERATURE REVIEW Debate on ways in which financial institutions can undertake social responsibility towards small firms has not been researched adequately. There are few studies that have attempted to discuss the subject area. In this section, I we trace the way in which the debate has developed, discussing the various issues on social responsibility of financial institutions towards small businesses.
3 Constraints of Small Firms Foremost among the constraints of small businesses are both external and internal factors. Factors which are considered external to the small firm include the problem of access to institutional credit which is most commonly cited. Gauthier (1984) and Lawson (1990) have provided the most appropriate tactics for the banks to adopt to improve access of small firms to institutional credit. The authors propose that shifting of resources and investment towards small firms can stimulate growth among such businesses. Many authors have identified the very limited access of small firms to formal credit as a major problem. In most of the surveys reviewed by Gauthier (1984), less than one per cent of the respondents reported success in obtaining a bank loan. There is much evidence to suggest that, even where government credit schemes have been established to assist small borrowers, they have been ineffective in meeting their needs. Internal factors to the small firm includes lack of technical and managerial ability. Among the recommendations in various studies include the need for improved training facilities in technical and managerial areas. The responsibility of financial institutions The social responsibilities may include reduction of pollution, provision of community initiatives such as hospitals, sporting centres, employment of the physically handicapped. These activities are not necessarily aimed at maximising the bank's profits but help to contribute to the common good of the communities in which they operate. The second school of thought argues that the responsibility of the financial institutions is to make profit for its shareholders and that they should not be concerned with undertaking the social responsibilities discussed above. Social responsibilities are often neglected for various reasons which may be political and economic. It is often stated that it is the responsibility of the bank managers to maximise their company's profits. Maximisation of profits not only means making an effort to generate greater profits but making every effort to make profits as large as possible - thus subordinating literally everything (including social welfare and responsibilities) to the increase in profits for its shareholders. Drucker (1988) suggests that the level of economic development usually depends on the level of knowledge of the population. The level of knowledge is closely linked to the social and cultural factors in the community. Social factors have an impact on the attitude and expectations of the community as a whole. Thus social responsibility and entrepreneurship go hand in hand. The two are dependent on each other. Small businesses are exposed to fluctuations, cyclic tendencies and uncertainties. The existence of the commercial bank is dependent on a strong and successful small business sector.
4 Friedman (1970), argued that a corporation has only one responsibility - maximising profits for its shareholders while operating within the limits set by the law. In his view, it is a responsibility of corporations to respect all the laws which protect the public interest. Going beyond this would amount to having "socially responsible executives" who, according to Friedman, would function as redistributors who would take other people's money and spend it on what these executives themselves defined as the "general social interest" as if they were some sort of self-appointed tax collectors. Maximisation of profit Friedman's contention is that it will be better for everybody if business executives including bank managers, concentrate on maximisation of profits for in this way, they would promote the good of the society in which they operate. Friedman is in no way against charity and giving to the needy. He is against giving other people's money to the needy. His view is that if a corporation spends money supporting worthy causes instead of distributing that money among its shareholders, it is thereby preventing the latter from supporting the causes they prefer. The right course of action, in his view, would be to distribute all profits to the shareholders and then each of them would be in a position to make any contribution he or she likes or no contribution at all. The above views by Friedman have been challenged. For example, the shareholders, are entitled to be remunerated for the use of their money. Even more, as they are the ultimate bearers of financial risk in the enterprise, they are entitled to higher to a higher return than creditors and corresponding to the real chance they have to lose the whole or substantial part of their investment. There are certain considerations which tend to limit the indiscriminate assumption of social responsibilities by a commercial bank to small businesses. For example, the commercial bank's law may be clear that the banks' assets do not belong to the shareholders, but to the bank itself (Lawson, 1990). Many commercial banks make donations for worthy causes and go in many matters beyond their strict legal duties. If a firms commitment to acting morally and to promoting reasonably the common good is clearly expressed in its mission, objectives and other statements of the company's intentions, prospective investors will have reasonable notice before they commit their funds to the firm. It is very important not to go to the extreme and assume that commercial bank executives are justified in using indiscriminately their companies' resources in trying to cure all manner of social ills. According to Gauthier (1984), there are limits in the responsibilities of the banks in terms of time, capacities and resources which makes it impossible to attend effectively to all opportunities of doing good and avoiding harm. Organisations like individuals, need to concentrate to pursuing some specific objectives in order to act effectively. In the case of commercial banks, the attainment of economic objectives. Some authors like Kay (1993) and Lawson (1990), argue that the basic responsibility of a firm is to balance the interests of all its "stakeholders" that is to say, of all parties which are affected by its operations. A commercial banks' stakeholders comprise not only its owners, managers and other employees but also other parties such as
5 customers, creditors, suppliers, trade unions and communities in which the bank operates. From the above literature review financial institutions are seen as having a responsibility of acting ethically because individual human beings have that responsibility both in the occasions in which they act on their own and in those occasions in which they act jointly with others. RESEARCH FINDINGS The respondents were branch managers and assistant staff of commercial banks in Kenya and Tanzania. In Table 1 information from the branch managers on their description of social responsibility for small businesses and the community is presented. The Table shows that there are different approaches to the understanding of social responsibilities. Table 1 : Description of Social Responsibility for Small Businesses The commercial bank must place the interests of the community and small businesses above profits 4.5% The commercial bank must grant funds with good judgement and must contribute towards the wealth of the community 14.5% The bank must keep a balance between profits and community interests 20.5% Maximum profits for the bank will ensure that growth is achieved which in turn provides job Opportunities and social responsibility. 55.0% Respondents did not answer 5.5% About 55.0% of the respondents (branch managers) reported that the most relevant description of social responsibility is the maximisation of profits by the bank which would in turn ensure the existence and growth of the bank. From Table 1, it can be seen that the second most important description of social responsibility is a balanced approach between profits and community interest (20.5%). The above finding is in line with the thinking by Drucker (1988) who asserts that economic benefit is the principle task of a business and profitability is the main basis upon which business decisions are undertaken. The respondents were also asked to indicated what they saw as the most important areas of social responsibility for the communities in which they operate or nationally. The results are indicated in Table 2 :
6 Table 2 : Areas of Social Responsibility for Small Businesses Frequency Percentage 1. Low interest rates 2. Adequate financial package 3. Training of owners of small businesses 4. Better client /customer relations 5. Ensure the success of small businesses 10 52 11 15 12 10% 52% 11% 15% 12% The granting of adequate financial package was selected as the most important area of social responsibility for small businesses. Other important areas of social responsibility that were identified were good client relations. The fact that the respondents acknowledge that good customer relations and the training of small business owners are important, shows that they do have a sensitivity towards other areas as well. Evaluation of loan applications The evaluation of loan applications is one of the main tasks of the branch manager. His task includes ensuring that the loans are repaid and in the process reasonable interest must be earned to ensure the profitability of the bank. In order to measure the social responsibility of the respondents, in this regard, the branch managers were requested to provide the criteria used for granting loans to small businesses. It was pointed out that the branch manager will ensure that the client has the necessary security which can guarantee that he/she has the ability to repay the loan. The managers revealed that sometimes they were short-sighted by not ensuring that the clients had the ability to repay the loan especially when the client runs the risk of insolvency. This information shows that the commercial banks still have shortcomings with regard to the area of social responsibility for small businesses. Criteria to grant credit The criteria used by the bank managers in granting credit to small businesses was discussed. In the Table 3, the criteria used by the respondents are indicated. Table 3 : Criteria used in Granting of Credit Frequency Percentage Creditworthiness 24 24% Security/Collateral 21 21% Financial Needs 13 13%
7 Analysis of financial statements 10 10% Management ability 6 6% Economic conditions 3 3% Political considerations 3 3% Viability 15 15% Job creation 5 5% The above results show that even if the respondents may acknowledge the importance of the viability and the financial needs of the small business, these are considered to be of less importance than security or collateral that is held and the creditworthiness of the client. These findings reveal the amount ignorance of the bank managers on the needs of the business community as well as economic needs. The emphasis by the bank managers is on the protection of bank's own interests with the interest of the business community being seen as of secondary importance. The overall picture is that the commercial banks are still practising the "known and traditional" approaches towards social responsibility regarding small businesses - that of emphasis on economic rather than socially responsible business actions. Whilst the managers acknowledged, to some extent, that they had an obligation with regard to the social responsibility, they were also expected to improve the image of the bank. Thus a balance had to be struck between the need to maximise bank profits and the interests of the community in which they operate including small business owners. SUMMARY The position that the only social responsibility of commercial banks are to keep the law and maximise their profits is not sound because moral responsibilities go beyond legal duties and that groups, not only individuals, have moral and social responsibilities. The claim by some authors that all economic surplus generated by a bank belongs exclusively to the shareholders has no basis in law and in "accepted" practice. The position that the main responsibility of commercial bank is to balance the interests of all stakeholders is not sound either. The banks responsibilities towards its employees or members are stronger than those it has towards other stakeholders. The findings from this study show that the commercial banks should make profit but they are not expected to do so at the cost of the business community in which the bank operates. Both the bank and the small business community should support each other in order to fulfil each others' business expectations. This can be effectively done if the socio-cultural aspects are taken into account by the bank in their dealings with the business community. The interdependence of both sectors of the economy must be acknowledged and actions should be directed towards a better understanding of the two sectors. Social responsibility should be considered as an essential element in the creation of a favourable business climate. Commercial banks are encouraged to invest some of the profits in the shortcomings of the community, thereby contributing towards the development of the community as a whole. Because of the small business sector in the business of the bank, the success of the small business makes a direct contribution
8 towards the profits of the commercial bank. It is therefore in the interests of the bank to assist the small businesses in attaining business success and prosperity. One of the areas where the commercial bank and in particular the bank manager, can make a valuable contribution is with regard to training and development of the business skills of small businesses. REFERENCES Drucker P. F. (1988), The Coming of the New Organisation, in Harvard Business Review, January-February 1988. Gauthier D. (1984), Morals by Agreement, Oxford : Oxford University Press. Friedmann M. (1970), 'The Social Responsibility of Business is to Increase its Profits', New York Times Magazine, September, 1970. Kay J. (1993), Foundations of Corporate Success, Oxford University, Oxford, UK. Lawson G (1990), 'The Ethics of Insider Trading' in Harvard Journal of law and Public Policy, USA.