Small’Businesses’Access’to’Finance

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Basel and Credit Assessment

The Basel Committee for Banking Supervision expects that the banks’ board of directors ensure that the bank has applicable credit assessment processes and that banks should have a system that consistently classifies loans according to credit risk (Basel Committee on Banking Supervision, 2006b). Further, the bank should document a “sound loan loss methodology” that describes the banks credit assessment policy, controls and identifies problem loans. In a survey conducted by the European Commission in 2005, banks in Europe were asked to participate in a survey regarding Basel II and credit management for SMEs. In this survey banks in Europe have the opinion that they will require more information from their credit customers. A timely delivery of business plan information is of particularly importance. Further, regarding loan pricing policy, banks expect an adjustment of price that compensates risk. In addition banks expects a tighter monitoring of credit risk and creditworthiness of loan and loan costumers (European Commission, 2005).

Research Design

In order to fulfil the purpose of the thesis, where the authors want to investigate how Swedish banks are managing their credit assessment to small business and the effect of Basel III, it is of importance to develop a research design that is adjusted to its object. A research design provides the activities for the research and specifies the methods for collecting and analysing the needed information (Zinkmund, Babib, Carr & Griffin, 2010). Yin (2003, p. 20) adds that “a research design is a logical plan for getting here to there, where here may be defined as the initial set of questions to be answered, and there is some set of conclusions (answers) about these questions”. The plan for this research takes it starting-point with research questions, which the authors have constructed based on the underlying problem discussion and purpose. The aim is to answer these questions in the result section, where collections of relevant theories and empirical findings are needed for the specific area of interest.

Deductive and Inductive Approach

A research project is in need of theory and there are different research approaches that can be assigned in order to understand the use of the theory and the design of the project (Saunders, Lewis & Thornhill, 2009). The two main approaches to theory are inductive and deductive, which both are applied within this study. An inductive approach seeks to build up a theory derived from the data collection. A deductive approach is the opposite and assumes that a clear theoretical framework and research questions is developed before the empirical work, and the researcher design a strategy to test the theory (Saunders et al., 2009). This research is primarily based on a deductive approach, where the authors first gathered a complete theoretical framework, by reviewing literature within the area of the subject.

2 Interview Execution

In order to keep the research in line with the purpose of the thesis, the respondents were carefully chosen by the authors. After an exhaustive review of the Swedish banking sector, ten banks with corporate services were allocated. Due to time and geographical constraints3 , six banks were chosen for interviews. In order to balance the study, the authors decided to interview three banks from each size-segment. To define the size of the banks, the authors reviewed the banks annual reports and categorized the banks after their net interest income within their Swedish operations 4 . The authors decided to contact the banks in person and went to the bank offices for examine the interest of being a part of the research. There were positive responses from all banks and the best suitable respondents for the interview were assigned to fit the purpose of the study. Upon discussion with the banks, interviews were booked with key persons within the field of credit assessment to small businesses at the respectively bank.

Interview Challenges

One factor that is important to take into consideration is the trustworthiness of the respondent’s answers during the interviews. The respondent is the bank’s public face and might answer in the banks’ interest, hence embellish the picture. The respondent can also act inhibited because of the audio recording and may not tell the whole story. Further, the qualitative research is the primary source of this study and mainly based upon few persons’ answers. This may bias the research, when the analysis and conclusions are in consequently to large extent based upon their knowledge and understanding of the subject. How the authors manage these challenges to create a credible research will be treated in section 3.4 Quality Assessment.

Table of Contents :

• 1 Introduction
  • 1.1 Background
  • 1.2 Problem’Discussion
  • 1.3 Purpose
  • 1.4 Research’Questions
  • 1.5 Delimitation
  • 1.6 Definitions
  • 1.7 Disposition
• 2 Theoretical’Framework
  • 2.1 Small’Businesses’Access’to’Finance
  • 2.2 The’Risk’of’Lending’to’Small’Businesses
    • 2.2.1 The!Effect!of!Asymmetric!Information
  • 2.3 Credit’Assessment
    • 2.3.1 Credit!Rating
    • 2.3.2 The!Five!C’s
    • 2.3.3 LenderABorrower!Relationship
  • 2.4 The’Basel’Accord
    • 2.4.1 Basel!I
    • 2.4.2 Basel!II
      • 2.4.2.1 Pillar!
      • 2.4.2.2 Pillar!
      • 2.4.2.3 Pillar!
    • 2.4.3 Basel!III
    • 2.4.4 Basel!and!Credit!Assessment

• 3 Method
  • 3.1 Research’Design
    • 3.1.1 Deductive!and!Inductive!Approach
    • 3.1.2 Descriptive!and!Explanatory!Purpose
    • 3.1.3 Qualitative!and!Quantitative!Research
  • 3.2 Data’Collection
    • 3.2.1 Interviews
      • 3.2.1.1 SemiAstructured!Interviews
      • 3.2.1.2 Interview!Execution
      • 3.2.1.3 Interview!Challenges
    • 3.2.2 Statistics!Collection
      • 3.2.2.1 Challenges!With!Statistic!Collection
• 3.3 Data’Analysis
• 3.4 Quality’Assessment
  • 3.4.1 Trustworthiness
  • 3.4.2 Reliability!and!Validity
• 4 Interview’Responses
  • 4.1 Smaller’Banks’’Interview’Responses
  • 4.1.1 Small!Businesses
    • 4.1.2 The!Credit!Assessment!of!Small!Businesses
    • 4.1.2.1 Credit!Process
    • 4.1.2.2 Information!Gathering
    • 4.1.2.3 Price!of!Credit
    • 4.1.3 Effects!of!Basel!Accords
  • 4.2 Larger Banks’’Interview’Responses
    • 4.2.1 Small!Businesses
    • 4.2.2 The!Credit!Assessment!of!Small!Businesses
    • 4.2.2.1 Credit!Process
    • 4.2.2.2 Information!Gathering
    • 4.2.2.3 Price!of!Credit
    • 4.2.3 Effects!of!Basel!Accords
• 5 The’Economic’State’of’the’Swedish’Market
  • 5.1 Gross’Domestic’Product’and’Bankruptcies
  • 5.2 Credit’Losses
  • 5.3 Consumer’Price’Index’and’Interest’Rates
• 6 Analysis
  • 6.1 Small’Businesses
  • 6.2 Credit’Assessment’of’Small’Businesses
    • 6.2.1 Credit!Process
    • 6.2.2 Information!Gathering
    • 6.2.3 Price!of!Credit
  • 6.3 Effects’of’Basel’Accord
• 7 Conclusion
• 8 Discussion
  • List’of’References
  • Appendices

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How do Banks Manage the Credit Assessment to Small Businesses and What Is the Effect of Basel III? An implementation of smaller and larger banks in Sweden