THE ROLE OF BANKS IN THE UK TOWARDS PROVIDING SOCIAL VENTURE CAPITAL FOR SOCIAL ENTREPRENEURSHIP IN THE UK: Facilitators and Limitations
Table of Content
2.2 Definition of terms
3.1 Literature Review
4.1 Related Research
4.2 Scope and Limitation
This research has emphasized the importance of the role of banks in providing social venture capital to social entrepreneurs. As discussed in chapter five feedbacks from the various faculties in the United Kingdom has been a highly useful source of information for improving the relationship between banks and social entrepreneurs.
However research has indicated that banks can be far more effective in their role of providing social venture capital if they work from accepted set of criteria and identify the area of gap in credit delivery system and fill them through devising appropriate new scheme and implementing them to provide credit to social enterprises.
The bibliographies included in this appendix serve as sources which support the research.
FINANCIAL INSTITUTIONS AND MARKETS BY LM BHOLE AND JITENDRA
MANANGEMENT OF FINANCIAL INSTITUTIONS IN INDIA
Social entrepreneurship has been introduced as an innovative model that can address persistent problems of poverty and inequality by harnessing potential entrepreneurs to fuel economic and social growth. Social entrepreneurs apply both business principles and non-convectional approaches to solve intractable development challenges in their local communities which the public and private sectors are unable and unwillingly to address. Contrary to the traditional business entrepreneurs their goal is not exclusively to maximize financial profits. Rather, social impact is their primary objective. While their institutional models vary from those of the non-governmental organizations to privately owned social enterprises , social entrepreneurs have been successful in introducing new reforms and models to improve education, health outcomes, communication development, gender issues, economic growth among others.
Social entrepreneurship being a relatively emergent issue in the United Kingdom, with education and training providers realizing that more and more people want to run businesses which are not brutishly capitalist. A great number of courses which focus on social enterprises introduced. Those who have enrolled for the coarse do a mixture of a classrooms and hands on learning, covering subjects such as analyzing a changing society; understanding the public sector and profit reinvesting organizations; cooperative and mutualising; funding and financing; recruiting and staffing and trend and innovation.
The University of London course was United Kingdom’s only Bachelor of Arts in social enterprise, but a smattering of universities have started degree courses in the past couple of years and more are considering it. For instance the University of Bradford introduced a foundation in social enterprises. Since 2009, the University of Northampton offers a degree in social enterprise development. The School of Social Entrepreneurship (SSE) which is having an number of sites around Britain has recently opened its 10th school in Suffolk. Since 2009 it has opened five schools in Devon, Cornwall, Hampshire, Yorkshire and now Suffolk.
There are alongside informal courses run by small organization and masters program in social enterprise at faculties such as Liverpool, John Morees, Glasgow, Caledonian Business School and Oxford business school. According to ‘theguardian’, United Kingdom official entrepreneurship within the higher education says that he expects the number of students enrolling for the social enterprise course to get increasingly booked up. He added by saying that social enterprise will increasingly find its way onto academic agendas in the near future.
However, in spite of various schools within the United Kingdom introducing the social enterprise course and people’s willingness and readiness to enroll for the course, Banks in the UK seem to be hesitant in promoting social entrepreneurship. This could be as a result of social enterprises being associated with economic and technical risks which underlie the innovation process and the fact banks lack the expertise in identifying, selecting and financing social enterprises. Therefore, this paper seeks to address the impact of banks promoting social entrepreneurship by providing social venture capital to the social entrepreneurs in the UK. Through working with such enterprises will help the social entrepreneurs develop resulting in widespread gain for public budget.
This project consumed huge amount of time, research and dedication. Still, implementation would not have been possible if I did not have support of my professor. Therefore, I would like to extend my sincere gratitude to my supervisor Mr. Francis McGonigal. Without his superior knowledge and experience the project would like in quality of outcome and thus his support has been essential.
This research was also supported by my personal tutor Cindy Millman who provided insight and expertise that greatly assisted the research. I am also immensely grateful to the volunteer researchers who devoted their time and knowledge in the implementation of this project, although any errors are my own and should not tarnish the reputations of this esteemed person.
Nevertheless, I express my gratitude towards my family and colleague for their kind cooperation and encouragement which helped me in the completion of this project.
Entrepreneurship in general, is the process of designing, launching and running a new business, i.e. a startup company offering a product, process or service. It has been defined as the capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit. The entrepreneur is a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk. Rather than working as an employee, an entrepreneur runs a small business and assumes all the risk and reward of a given business venture, idea, or good or service offered for sale. The entrepreneur is commonly seen as a business leader and innovator of new ideas and business processes. Entrepreneurs perceive new business opportunities and they often exhibit positive biases in their perception that is, a bias towards finding new possibilities and unmet market needs and a pro-risk-taking attitude that makes them more likely to exploit the opportunity. Entrepreneurial spirit is characterized by innovation and risk-taking.
Social entrepreneurship therefore, is the act of devoting all efforts to the mission of creating social value, relentlessly purse new opportunities engage in the process of continuous innovation and learning, act boldly without being limited by resources currently in hand and exhibit heightened accountability to society and outcomes created. Gregory Dees (1998). Social entrepreneurs are more of maximizing social returns rather than their own financial benefits and profits.
The exploitation of entrepreneurial opportunities may include actions such as developing a business plan, hiring the human resources, acquiring financial and other required resources, providing leadership and being responsible for the venture’s success or failure. Joseph Schumpeter (1883–1950) stated that the role of the entrepreneur is creative destruction and the changes and dynamic disequilibrium brought on by the innovating entrepreneur is the norm of a healthy economy.
Social entrepreneurs are involved in creating social value; they want to produce social impact, change society and find lasting solutions to social and environmental problems. When public institutions fail and when welfare state and non-governmental organizations encounter difficulties social entrepreneurs are often there to offer creative thinking, entrepreneurial spirit, expertise and cost-effective approach.
Social entrepreneurship serves as an incubator for social innovation by seeking new ideas and solutions. However they can bring about structural change to the extent that their innovative ideas are incorporated into practical work of the welfare state. It is therefore the responsibility of the state to institutionalize the innovations which are produced by the social enterprise and make them a part of the system.
Social entrepreneurship, particularly on the part of the younger generation, makes one thing very clear: Anyone can help to shape social change and contribute to a society that takes responsibility rather than looking to others to do so. In order to these financial institutions particularly banks, should play a major role in providing social venture capital for social entrepreneurships in the United Kingdom.
Entrepreneurship typically operates within an entrepreneurship ecosystem which includes government programs and services that promote and support entrepreneurs non-government organizations such as small business associations or organizations that offer advice and mentoring to entrepreneurs for example, through entrepreneurship centers or websites, entrepreneurship resources for instance, business incubators and seed accelerators, entrepreneurship education programs, training and financing for example, loans, venture capital financing, angel investing and grants. The best entrepreneurship ecosystems are those found in top entrepreneurship hubs such as Silicon Valley, where there is a cluster of high-tech firms, top research universities and venture capitalists.
1.1 Statement of the problem
In order for the social entrepreneur to continue providing innovative solutions to society’s most pressing social problems in the UK, banks in the UK have to promote them by providing social venture capital for social entrepreneurship in the UK.
Currently, provision of social venture capital by banks in the UK is often difficult since the level of returns and profitability are different as compared to the normal enterprise. If banks do not provide social entrepreneurs with the social venture capital they will not be persistent in tackling major social issues and offer new ideas for wide scale change.
1.2 Purpose of study
The main aim of this research was to examine the factors which facilitate and limit banks in their role to providing social venture capital for social entrepreneurships in the UK. Moreover, the paper seeks to address the importance of social entrepreneurship in the UK and answer the research questions.
The paper has further been constructed into chapters as follows. In chapter one the paper will outline the general introduction, background information to dissertation, objectives of the dissertation, the rational for the dissertation, plan, methodological issues and problems. Limitation of the dissertation shall also be hinted here. Chapter two shall include the literature review and the definition of terms. Chapter three shall highlight the methodology, assumptions, scope and limitations. Chapter four shall obtain the results and the lastly chapter five which shall have the conclusion and recommendation.
1.3 Significance of the study
The main aim of this study is to highlight the factors which facilitate and limit banks in their role of providing social venture capital for social entrepreneurship. Credit being the prime input for sustained growth of social entrepreneurs and its availability is thus a matter of great importance. To ensure that financial assistance is made available to social entrepreneurs on easy terms and with hassle-free procedures, it has to be a matter of policy for banks to identify the areas of gap in credit delivery system and fill them through devising appropriate new schemes and implement them to provide credit.
1.4 Research Questions
The following research questions have been identified as part of this research:
- What factors influence the banks to provide social venture capital to social entrepreneurs?
- How can the relationship between social entrepreneurs and banks be improved to facilitate social entrepreneurship?
- What should be the role of government in improving availability financing for social entrepreneurship in UK?
The importance of banks in providing capital for social venture capital is instrumental in providing financial resources for the social entrepreneur (Cao et al., 2015, Choi and Majumdar, 2014, Dacin et al., 2011). The provision of capital for social entrepreneurship is often difficult due to factors such as, risks and uncertainties involved in the innovation process and also the fact that level of return and the profitability are different as compared to normal enterprise, and therefore this can put on extra pressures on stakeholders (Dacin et al., 2010, Desa and Basu, 2013, Ellis, 2011). This work seeks to examine the factors which can have positive influence on the relationship between banks and the social entrepreneur, in order to facilitate the social venture capital (Ellis, 2011, Felicio et al., 2013)
The following are the objectives of this research:
Examine factors which influence banks in providing social venture capital for social entrepreneurships.
Seek for ways of improving the relationship between the social entrepreneurs and the banks in the UK.
How the government can improve availability financing for social entrepreneurship in the UK.
1.7 Project Plan
This table shows a dissertation project schedule that extends from 1st December 2016 to 30th March 2017. There are 4 major planned tasks as shown in this table
2 Literature review
Social entrepreneurship unlike economic entrepreneurship considers the dimension of social and environmental value and contribution Kater and Summers, (1987) Social venture is increasingly important to consider, as the social entrepreneurship can lead to a positive change in the wider environment(Cao et al.,2015, Choi and Majumdar, 2014, Dacin et al., 2011). Social entrepreneurs being the drivers of innovation and transformation in the various fields including health, human rights, workers rights environment and enterprise development they need finances in order to achieve their goals. Research further suggest that social entrepreneurship can be improved with the collaboration between the different organizational sectors (Dacin et al., 2010, Desa and Basu, 2013, Ellis, 2011).
Research has found out that it is often difficult for banks to provide social entrepreneurs with venture capital. This is because the social entrepreneurs’ level of return and profitability are different as compared to the profit-making enterprises. One of the inhibiting factor is the lack of profitability which can be a major hindrance for the banks to provide the social entrepreneur with capital, (Estrin et al., 2013, Felicio et al., 2013Gedajlovic et al., 2013). The lack of confidence that bankers often have in social entrepreneur has been highlighted as one of the main factors which can continue to influence the financing of social venture capital (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010). Banks often cannot examine the risks that they undertake as part of the social venture capital, and therefore it is difficult for the social entrepreneur to collect resources (Estrin et al., 2013, Felicio et al., 2013Gedajlovic et al., 2013).
However, the literature highlights that the social entrepreneurs have many other ways of generating capital, and these can be used innovatively in order to ensure long term support for social entrepreneurs (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010). The social entrepreneurs can ensure that venture capital firms are used in collaboration with banks in order to generate low cost financing (Griskevicius et al., 2013,. Hall et al., 2012, Lepoutre et al.,2013). The use of innovative capital resources is also needed in order to have as positive impact on the wider community issues, leading to a long term support of the social entrepreneurship. The ability to deliver new changes is also an important issue for management, which leads to positive changes in the way that the new services can be improved (Ellis, 2011 Felicio et al., 2013).
The wider benefits that are facilitated due to the increase in social entrepreneurship needs to be facilitated in order to have a positive change in the way services are provided (Lumpkri et al., Madean et al., 2013, Nga and Shamuganathen2010). The role of the government in providing these factors, and acting as a facilitator of low cost finance can also have significant positive change in the way finances are provided (Philip et al., 2015, Reubottom, 2013, Santos, 2012). This will be ensured in order to deliver a positive change, leading to different types of innovations (Griskevicius et al., 2013,. Hall et al., 2012, Lepoutre et al.,2013). The role of the government is to ensure that the various types of services which can be understood and can lead to a wider and positive change in the society (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010). Companies must ensure that they have a better understanding of the wider benefits which social venture capital provides, and therefore examine not just profitability but also the benefits to members of the society (Shaw and de Bruin, 2013, Stam et al., 2014, Zahra et al., 2009).
The literature also highlights that governments and other stakeholders need to work collaboratively with social venture capitalists as well as banking institutions to bring reform for the social entrepreneurs (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010). This is especially needed in order to facilities low cost finance, and to bring in wider benefits for the social sector which is needed for the financing of the social goods in the society (Ellis, 2011 Felicio et al., 2013). Society needs to evolve over a period of time, and the positive role that social entrepreneurs have in the society needs to be highlighted (Shaw and de Bruin, 2013, Stam et al., 2014, Zahra et al., 2009). The literature is widely not clear about the role which governments and other stakeholders can play in facilitating this process, especially in the case of Viet Nam. There is a need to understand these issues which can be undertaken in the most robust manner (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010). The research also needs to understand the perspectives of the social entrepreneur, and the ways in which they are able to develop the sustainability of their operations in collaboration with other stakeholders (Choi and Majumdar, 2014, Dacin et al., 2011, Dacin et al., 2010)
2.1 Definition of terms
Social venture capital is defined by the free encyclopedia as a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve a reasonable gain in financial return while delivering social impact to the world. It deviates from the traditional venture capital model, which focuses on simple risk and reward.
Social entrepreneurship as per the free encyclopedia, is defined Social as the use of the techniques by startup companies and other entrepreneurs to develop, fund and implement solutions to social, cultural, or environmental issues. This concept may be applied to a variety of organizations with different sizes, aims, and beliefs. For-profit entrepreneurs typically measure performance using business metrics like profit, revenues and increases in stock prices, but social entrepreneurs are either non-profits or blend for-profit goals with generating a positive “return to society” and therefore must use different metrics. Social entrepreneurship typically attempts to further broad social, cultural, and environmental goals often associated with the voluntary sector in areas such as poverty alleviation, health care and community development.
Social entrepreneur is someone who recognizes a problem and uses entrepreneurial principles to organize, create and manage a venture to make social change. The Canadian Social Entrepreneurship Foundation defines a social entrepreneur as an individual with innovative solution to society’s most pressing social problems. They are ambitious and persistent, tackling major issues and offering new ideas for wide-scale change. Some of a social entrepreneur’s characteristics are listed below.
Risk taking, the meaning of risk is uncertainty that is, have imperfect knowledge of what might happen be the outcome of a particular activity. Therefore, social entrepreneurs take calculated risks since they want to be successful.
Self confidence, social entrepreneurs should have faith in themselves and their abilities. They should be confident to implement change and overcome any resistance to change. The social entrepreneurs should own the mistakes they commit and correct them.
In the course of their activities social entrepreneurs just like any other entrepreneurs, do encounter problems in the various activities they are involved in. some of these problems are:
Credit facilities, some social entrepreneurs are denied credit by bankers on the ground of lack of collateral security. Therefore, their access to risk capital is limited. The complicated procedures and delay in obtaining bank loans deter social entrepreneurs from obtaining loans.
Financial problems, obtaining support of bankers managing and working capital, lack of credit resources still remain to be a problem not only in social entrepreneurship but in the entrepreneurship domain as a whole.
The research attempted to address factors which facilitate and those which limit banks in their role of providing social venture capital to social entrepreneurships. In order to achieve this, the researcher deployed mixed method approach. Mixed methods technique is a technique where researcher deploys two or more research methods synonymously (Johnson et al., 2007, Sale et al., 2002) in order to investigate the issue at hand. This study therefore, performed both qualitative and quantitative analysis to assess the determinants of social venture capital expected performance.
The researcher used both qualitative and quantitative methods. He used In-depth interviews as part of qualitative research whereas he used questionnaire as part of quantitative method. The researcher used both methods in order to triangulate research results. This was achieved by comparing interview results with questionnaire results. A questionnaire is data gathering tool that allows the researcher to gain knowledge with help of a list of questions that are prepared by the researcher. For this case the researcher deployed semi-structured questionnaire which have both close and open ended questions, so that respondents view is taken into account (Denzin and Lincoln, 2005, Curry et al., 2009). This research distributed a total of 100 questions among the bank managers in order to gain insight on the topic area.
The researcher also deployed In-depth interviews to help him gather in-depth knowledge on the topic area. In-depth interviews gather useful information with the help of question and answer session held between researcher and respondent (Pelsner, 2011, Oatey, 1999). This research used open ended interviews, where the most important themes are identified by respondents themselves, which contribute towards results. Tryst that is, privacy is one of the most important elements of in-depth interviews and facilitates honest and unbiased exchange of information to takes place between both the parties (Bourquin et al., 2011,Frey and Oishi, 1995). In-depth interviews were carried out both with social entrepreneurs and bank managers. 5 interviews were conducted with social entrepreneurs and 5 with bank managers.
4 Relate purpose & Research
4.1 Concept of Entrepreneurship:
The word “entrepreneur” is derived from the French verb “enterprendre”, which means ‘to undertake’. This refers to those who “undertake” the risk of new enterprises. An enterprise is created by an entrepreneur. The process of creation is known as entrepreneurship.
Entrepreneurship is a process of actions of an entrepreneur who is a person always in search of something new and exploits such ideas into gainful opportunities by accepting the risk and uncertainty with the enterprise.
4.1.1 Characteristics of Entrepreneurship:
Entrepreneurship is characterized by the following features:
- Economic and dynamic activity:
Entrepreneurship is an economic activity because it involves the creation and operation of an enterprise with a view to creating value or wealth by ensuring optimum utilization of scarce resources. Since this value creation activity is performed continuously in the midst of uncertain business environment, therefore, entrepreneurship is regarded as a dynamic force.
- Related to innovation:
Entrepreneurship involves a continuous search for new ideas. Entrepreneurship compels an individual to continuously evaluate the existing modes of business operations so that more efficient and effective systems can be evolved and adopted. In other words, entrepreneurship is a continuous effort for synergy (optimization of performance) in organizations.
- Profit potential:
“Profit potential is the likely level of return or compensation to the entrepreneur for taking on the risk of developing an idea into an actual business venture.” Without profit potential, the efforts of entrepreneurs would remain only an abstract and a theoretical leisure activity.
- Risk bearing:
The essence of entrepreneurship is the ‘willingness to assume risk’ arising out of the creation and implementation of new ideas. New ideas are always tentative and their results may not be instantaneous and positive.
An entrepreneur has to have patience to see his efforts bear fruit. In the intervening period (time gap between the conception and implementation of an idea and its results), an entrepreneur has to assume risk. If an entrepreneur does not have the willingness to assume risk, entrepreneurship would never succeed.
4.1.2 Importance of Entrepreneurship:
- Development of managerial capabilities:
The biggest significance of entrepreneurship lies in the fact that it helps in identifying and developing managerial capabilities of entrepreneurs. An entrepreneur studies a problem, identifies its alternatives, compares the alternatives in terms of cost and benefits implications, and finally chooses the best alternative.
This exercise helps in sharpening the decision making skills of an entrepreneur. Besides, these managerial capabilities are used by entrepreneurs in creating new technologies and products in place of older technologies and products resulting in higher performance.
- Creation of organizations:
Entrepreneurship results into creation of organizations when entrepreneurs assemble and coordinate physical, human and financial resources and direct them towards achievement of objectives through managerial skills.
- Improving standards of living:
By creating productive organizations, entrepreneurship helps in making a wide variety of goods and services available to the society which results into higher standards of living for the people.
Possession of luxury cars, computers, mobile phones, rapid growth of shopping malls, etc. are pointers to the rising living standards of people, and all this is due to the efforts of entrepreneurs.
- Means of economic development:
Entrepreneurship involves creation and use of innovative ideas, maximization of output from given resources, development of managerial skills, etc., and all these factors are so essential for the economic development of a country.
4.1.3 Factors affecting Entrepreneurship:
Entrepreneurship is a complex phenomenon influenced by the interplay of a wide variety of factors.
Some of the important factors are listed below:
- Personality Factors:
Personal factors, becoming core competencies of entrepreneurs, include:
(a) Initiative (does things before being asked for)
(b) Proactive (identification and utilization of opportunities)
(c) Perseverance (working against all odds to overcome obstacles and never complacent with success)
(d) Problem-solver (conceives new ideas and achieves innovative solutions)
(e) Persuasion (to customers and financiers for patronization of his business and develops & maintains relationships)
(f) Self-confidence (takes and sticks to his decisions)
(g) Self-critical (learning from his mistakes and experiences of others)
(h) A Planner (collects information, prepares a plan, and monitors performance)
(i) Risk-taker (the basic quality).
- Environmental factors:
These factors relate to the conditions in which an entrepreneur has to work. Environmental factors such as political climate, legal system, economic and social conditions, market situations, etc. contribute significantly towards the growth of entrepreneurship. For example, political stability in a country is absolutely essential for smooth economic activity.
Frequent political protests, strikes, etc. hinder economic activity and entrepreneurship. Unfair trade practices, irrational monetary and fiscal policies, etc. are a roadblock to the growth of entrepreneurship. Higher income levels of people, desire for new products and sophisticated technology, need for faster means of transport and communication, etc. are the factors that stimulate entrepreneurship.
Thus, it is a combination of both personal and environmental factors that influence entrepreneurship and brings in desired results for the individual, the organization and the society.
4.1.4 Functions of an Entrepreneur:
The important functions performed by an entrepreneur are listed below:
An entrepreneur is basically an innovator who tries to develop new technology, products, markets, etc. Innovation may involve doing new things or doing existing things differently. An entrepreneur uses his creative faculties to do new things and exploit opportunities in the market. He does not believe in status quo and is always in search of change.
- Assumption of Risk:
An entrepreneur, by definition, is risk taker and not risk shirker. He is always prepared for assuming losses that may arise on account of new ideas and projects undertaken by him. This willingness to take risks allows an entrepreneur to take initiatives in doing new things and marching ahead in his efforts.
An entrepreneur is a practical dreamer and does a lot of ground-work before taking a leap in his ventures. In other words, an entrepreneur finalizes an idea only after considering a variety of options, analyzing their strengths and weaknesses by applying analytical techniques, testing their applicability, supplementing them with empirical findings, and then choosing the best alternative. It is then that he applies his ideas in practice. The selection of an idea, thus, involves the application of research methodology by an entrepreneur.
- Development of Management Skills:
The work of an entrepreneur involves the use of managerial skills which he develops while planning, organizing, staffing, directing, controlling and coordinating the activities of business. His managerial skills get further strengthened when he engages himself in establishing equilibrium between his organization and its environment.
However, when the size of business grows considerably, an entrepreneur can employ professional managers for the effective management of business operations.
4.1.5 Overcoming Resistance to Change:
New innovations are generally opposed by people because it makes them change their existing behavior patterns. An entrepreneur always first tries new ideas at his level.
It is only after the successful implementation of these ideas that an entrepreneur makes these ideas available to others for their benefit. In this manner, an entrepreneur paves the way for the acceptance of his ideas by others. This is a reflection of his will power, enthusiasm and energy which helps him in overcoming the society’s resistance to change.
4.1.6 Catalyst of Economic Development:
An entrepreneur plays an important role in accelerating the pace of economic development of a country by discovering new uses of available resources and maximizing their utilization.
To better appreciate the concept of an entrepreneur, it is desirable to distinguish him from an entrepreneur and promoter.
4.1.7 Benefits of Entrepreneurship
Any individual, who possesses a business, firm, or venture, is known as an entrepreneur. He or she is accountable for its development, the inherent risks and returns associated with it. Entrepreneurship is defined as the practice of beginning a new trade or reviving an existing business, for capitalizing on fresh opportunities. The entrepreneurial activities for a particular kind of business depends upon various factors and is quite specific on the kind of business or firm being run. Whatever may be the course of action, entrepreneurship has a lot of benefits both for the entrepreneurs and the society in which these businesses are carried out. Some of these benefits include:
- Opportunity to get control.
Owning a firm or a business endows the entrepreneurs with the independence and opportunity to control their own business. They can aim to achieve targets that are important to them. Entrepreneurship provides entrepreneurs a chance to take decisions according to their own wishes.
- Offers a chance to make a difference
Some people begin and put a lot of effort just to make a difference in society. This has given rise to the concept of social entrepreneurship, which is a recent phenomenon. Such people search for opportunities to serve a cause that is significant to them and try to find pioneering solutions to some of the most pressing and challenging problems of society.
- To reap high Profits
Reaping high profits by being an entrepreneur is one of the most important factors that motivate people to become one and take up all the challenges associated with it. The profits their companies and businesses make play a vital role in any decision made by entrepreneurs. Owning a business or a firm is the best way towards accumulation of wealth.
- Helps people work to their full potential
Many entrepreneurs find their work to be extremely enjoyable. They consider their business as an instrument of self-actualization and self-expression. Owning a firm or a business acts as a test for the creativity skills, abilities, and determination of an entrepreneur and is taken up as a challenge towards success.
- Offers a chance to pursue their interests.
Most entrepreneurs don’t believe their work to be actual work. Most of them establish businesses closely associated with their interests. As such, there is no particular age for retirement of entrepreneurs. With all these benefits people now consider the alternative of running their own small businesses rather than doing jobs for others.
4.1.8 Financial Institutions in promoting entrepreneurship
During the past decade, there has been a deepening as well as widening of the entrepreneurial structure as well as the small-scale preindustrial structure. Not only have the established small industries increased their installed capacity and output, but a wide range of new small industries has also come into being. During the last two decades, there is a boom of entrepreneurial activities in the country. Thus, in the field of capital-and product goods industries, enterprises manufacturing such items as machine tools, electrical and engineering equipment, chemicals etc., which provide the foundation for a self (sustained growth of the economy have been set-up. Amongst the consumer goods industries, small units producing such items such as bicycles, sewing machines, plastic products, etc. are foregoing ahead.
These far-reaching developments and the scale and scope of operation of entrepreneurs, particularly in small-scale industries, have brought to the fore the importance -of provision of administrative and institutional assistance at various levels.
Over the years, financial institutions are playing a key role in providing finance and counseling to the entrepreneurs to start new ventures as well as mode diversifies and even rehabilitate sick enterprises. In this context, we shall discuss the scale and scope of operation of various development banks, institutions that have been rendering financial assistance, directly or indirectly, to entrepreneurs and their various ventures.
Project finance scheme (loans, underwriting, direct subscription and guarantees); Modernization Assistance Scheme for all industries; Textile Modernization Fund Scheme; Technical Development Fund Scheme; Venture Capital Fund Scheme; Energy Audit’ Subsidy’ Scheme; Equipment Finance for Energy Conservation Scheme; Equipment Finance Scheme; Foreign Currency Assistance Scheme.
Refinance Scheme for Industrial Loans for Small and Medium Industries; Refinance Schemes for Modernization and Rehabilitation of Small and Medium Industries; Equipment Refinance Scheme; Bills. Discounting/Rediscounting Scheme; Seed Capital Scheme; Scheme for Concessional Assistance for Development of No-Industry Districts and Other Backward Areas; Scheme for Concessional Assistance for Manufacture & Industrialization of Renewable Energy Systems; Scheme for Investment Shares and Bonds of Other Financial Institutions.
4.2 Scope & Limitation
The study was focused on Factors that facilitate and those that limit the role of banks in providing social venture capital to social entrepreneurship. The researcher formulated the scope and limitation of this project to identify the boundaries of the study. The scope of this study is:
- Which factors facilitate and limit banks in their role of providing social venture capital for social entrepreneurships in the UK.
- How relationship between banks and social entrepreneurship can be improved.
- How the government can help improve availability financing for social entrepreneurships in the UK.
However, the study will not cover sources of capital for social entrepreneurships
The present study is concerned with finding the factors that facilitate and those that hinder banks from providing social venture capital to social entrepreneurships in the UK, how to improve the relationship between banks and the social entrepreneurs and improving availability financing for social entrepreneurships.
In order to obtain the required information on the factors which facilitate and those that limit banks in their role of providing social venture capital for social entrepreneurships, The researcher interviewed the two groups involved that is the bank branch managers and the social entrepreneurs. The researcher was able to obtain the following information.
The research has found that close ties between financial intermediaries and firms reduce information asymmetries and lower financing constraints. Petersen and Rajan (1994) and Berger and Udell (1995) stated that borrowers with longer banking relationships are less likely to pledge collateral, less likely to rely on expensive trade credit, and hence are less constrained in their investment decisions than firms with shorter banking relationships. The research has found that small or decentralized banks where branch managers have greater authority to make adjudication decisions – are much more likely to lend to startups and small businesses.
These banks have a comparative advantage for evaluating informationally opaque or “soft information” businesses (Berger et al. 2001). They also are more likely to have appropriate incentives to act on the information than branch managers in large, hierarchical banks where adjudication decisions are centrally made (Stein 2002). Berger et al. (2005) find that differences in bank organizational structures impact the credit constraints of small firms across the U.S. Canales and Nanda (2008) demonstrate a similar effect for terms of lending to small businesses in Mexico. In many respects, the recent innovations for microfinance in developing countries, such as the Grameen Bank founded by Muhammad Yunus, can be seen as reducing monitoring cost for informationally opaque micro-businesses. These innovations enable financial intermediaries to lend smaller amounts to entrepreneurs at a profit due to the lower fixed costs of evaluating and monitoring projects.
The bank branch managers suggested that, potential entrepreneurs with information asymmetry and limited assets may have their good projects going unfunded as a result of the financial intermediaries, the banks being unable to evaluate them effectively. According to them, only the established firms having several advantages in this respect for instance, history of audited financial statements, great collateral to pledge against loans and are potentially able to partially fund expansion through retained earnings which are able to receive loans from the bank.
Financial intermediaries, banks play a vital role in determining which projects to fund and in monitoring these projects even after funding them. Therefore, as the cost of acquiring information about the borrower increases it becomes more difficult to fund them profitably. Stiglitz and Weiss (1981), outline why these large costs of screening and monitoring startups cannot be completely overcome by raising interest rates. They observe that raising interest rates may lead to adverse selection, where only entrepreneurs starting the most risky projects would agree to the bank’s loan terms. In such an instance, the banks would face greater default probabilities, making the loans unprofitable in expectation. They show theoretically that in such an instance, banks may be forced to ration credit rather than raise interest rates to market clearing levels. Credit rationing causes entrepreneurs to face financing constraints. Thus, innovations within the financial sector that lower information costs can have important effects on reducing financing constraints for entrepreneurs.
Competition among financial intermediaries particularly banks can impact the terms of credit to potential entrepreneurs. According to Levine (1997), the level of competition between financial intermediaries can impact the terms of credit to startups as well as the degree to which capital is allocated to the highest-quality projects. This can be achieved by charging above the market interest rates to mature firms and in turn charging below the market rates to the potential entrepreneurs. Petersen and Rajan (1995) argue that startups may benefit from concentrated banking markets because monopolist banks can engage in inter-temporal cross-subsidization of loans. As a monopolist bank can charge above the market interest rates to mature firms, it can, in turn, charge market rates to potential entrepreneurs.
Banks will willingly advance a loan to individuals permanently employed. Canales and Nanda (2008) show the important effects of the interaction between bank structures and the competitive environment when studying the terms of lending to small businesses in Mexico. Bozkaya and Kerr (2007) show that countries with strong employment protection laws where firing workers is more difficult are associated with weaker venture capital and private equity markets can have first-order effects on the presence and structure of certain types of financial intermediaries and hence on the availability of startup capital in certain types of industries.
According to the research banks are unwilling to give loans to social entrepreneurs especially startup because of the high risks and uncertainties in innovation. The researcher further studied that social entrepreneurs with a Bachelor of Arts in social enterprise course have higher chances of getting bank loans. This is because the course is not open to just anyone, the applicant has to prove that he is the right entrepreneur by undergoing an intensive testing process. The course requires the applicant to demonstrate his previous commitment to social change and his real potential to setup and sustain a social enterprise. According to the research conducted, the course has given students the support they need to get the business off the ground and without it they could not have made the business work.
Students taking the social enterprise course are privileged to work with experts in private and social business in order to progress their idea and work together to discuss issues and barriers to the development of their companies as well as go on visits to a variety of social enterprise to see them in action. Students also have good mentors and come out of their respective institution with a full trajectory of where the business is going. The students are confident in the course as it works well for them and it teaches them strong business skills in a social context for instance how to optimize funds and get returns for social businesses, how to scale-up quickly and franchise.
Evans and Jovanovic (1989), state that the amount an individual can borrow to fund a new venture is a function of the collateral that he or she can post, which in turn is a function of personal wealth. If the amount the entrepreneur needs to borrow is sufficient to cover the capital required to start the business, then the entrepreneur is said to be unconstrained.
On the other hand, if the entrepreneur needs to invest more than he or she can borrow, then a financing constraint leads to sub-optimal investment for the project at hand. Since returns to projects are a positive function of the capital invested, some projects that would have been profitable for an unconstrained entrepreneur become unprofitable for a constrained entrepreneur. Thus, a central prediction of this model is that the propensity to become an entrepreneur is a function of personal wealth if potential entrepreneurs are credit constrained. Wealthy individuals are less likely to be constrained for a given project. On the other hand, a null relationship between wealth and entrepreneurship would suggest that borrowing constraints are not binding for potential entrepreneurs.
Looking at whether there is a strong association between personal wealth and the propensity to become an entrepreneur may thus shed light on the nature of financing constraints in the economy. Evans and Jovanovic (1989) estimate their model using data from the National Longitudinal Survey of Youth (NLSY) and find significant support for the presence of financing constraints in their data. They argue that the positive relationship between personal wealth and entry into entrepreneurship can be seen as evidence of market failure, where talented but less wealthy individuals are precluded from entrepreneurship because they lack sufficient wealth to finance their new ventures.
This finding has been extremely influential in both academic and policy circles. While a null relationship between personal wealth and entrepreneurship points to a lack of financing constraints, Evans and Jovanovic (1989) note that unobserved heterogeneity may lead to a spurious correlation between personal wealth and entrepreneurship in empirical studies even if individuals do not face financing constraints. Subsequent work in this second strand of research has built on this canonical model, while attempting to better control for sources of endogeneity in order to understand the causal relationship between personal wealth and the propensity to enter into entrepreneurship. Below, we organize the subsequent work by two major categories of potentially spurious correlation.
A second source of spurious correlation arises from the fact that observed and unobserved individual abilities and preferences for entrepreneurship may be systematically correlated with personal wealth. For example, wealthy people may have lower absolute risk aversion, making them more likely to become entrepreneurs (Evans and Jovanovic 1989; Khilstrom and Laffont 1979). People may also have a preference for being their own boss that increases with greater personal wealth (Hurst and Lusardi 2004).
In addition, if wealthy individuals are more effectively able to exploit certain networks that help them gain access to scare resources, the relative ability of an individual as an entrepreneur compared to a wage worker may systematically change as they get wealthier – irrespective of their absolute ability in each sector. This may make wealthier individuals more likely to sort into entrepreneurship even if less wealthy individuals do not face financing constraints. Hurst and Lusardi (2004) argue in favor of this perspective. They document that the propensity to enter self-employment is relatively flat up to the 80th percentile of the U.S. wealth distribution.
Moreover, the strongest association between wealth and entry into self-employment is in the top five percent of the wealth distribution. As these very wealthy individuals do not generally start very capital-intensive firms, Hurst and Lusardi (2004) conclude that entrepreneurship may be a luxury good. People may derive non-pecuniary benefits of being their own boss (Hamilton 2000), in which case the wealthy may be more likely to sort into entrepreneurship due to these unobserved preferences rather than due to substantive financing constraints. In a similar vein, Moskowitz and Vissing-Jorgensen (2002) find that the returns to private equity investments among wealthy business owners are not large enough relative to public markets to account for the undiversified and illiquid stakes that they have in their businesses.
The research also point to the presence of unobserved preferences for self-employment that may drive this “private equity premium puzzle.” These studies would suggest caution about implementing policies to reduce financing constraints for entrepreneurs. Using micro data from Denmark, Nanda (2009) finds the same non-linear relationship between personal wealth and entrepreneurship identified for the U.S. by Hurst and Lusardi (2004). Moreover, he also finds that the wealthiest entrepreneurs are more likely to fail, particularly those founding businesses in less capital-intensive industries. Nanda argues that an important factor explaining this may be the disciplining role of the external capital markets.
Wealthy individuals are less likely to have their ideas screened and vetted by potential investors, lowering the threshold level of ability required for wealthy individuals to start businesses. In such an instance, a far greater proportion of wealthy individuals may become entrepreneurs because they do not face the discipline of external finance, even if less wealthy individuals with high ability do not face financing constraints. This view is similar to that of de Meza (2002), who provides a theoretical framework where an individual who is indifferent between becoming an entrepreneur and staying a wage earner is higher ability than the wage earners, but lower ability than the entrepreneurs.
When the cost of finance falls, these marginal individuals are most likely to select into entrepreneurship. This sub-section has highlighted a growing set of studies that have noted either a potentially spurious association between personal wealth and entrepreneurship or provided explanations for the correlations that do not invoke financing constraints. The conclusions of these studies suggest that in advanced economies, financing constraints may not play as important a role in impacting entrepreneurship as was previously believed.
Social entrepreneurs have opted to get credit from large lending and aid institutions which use microcredit instead of large scale capital approach as a way of helping them. Recently, the World Bank committed over $4.5 billion to small and medium enterprises in over 50 countries. World Bank funding of microloans is greatly augmented by the other various multilateral financing institutions. Even the U.S. government established a $75 million domestic microloan program to distribute in increments as small as $200. The loans charge an interest rate of approximately 10%, a huge opportunity for many social entrepreneurs who would typically have to pay interest as high as 29% if borrowing from a credit card which is likely source of loans because banks will not normally lend to social entrepreneurs. With major banks getting into the business, we are seeing an important migration from smaller microfinance institutions to larger banks and traditional financial institutions that see microfinance’s tremendous opportunity. Clearly small loans are now a booming business. Cleveland, T.
Social entrepreneurships serving as incubators and laboratories for social innovation seek to increase participation in social inclusion, combat poverty and social exclusion and to stop and improve the social environment. However, these social enterprises cannot achieve in furthering their social and environmental goal without getting financial support from financial intermediaries, particularly the banks. (Sandberg, 1986; Meginson and Weiss,1991; European Venture Capitalists Association, 1998,2005; Timmons and Spinelli, 1999) stated that firms which access venture capital funding perform much better than those which are not entitled to such funding.
Small enterprises and startups have encountered difficulty in securing external funding from banks. Bankers have denied this class of social entrepreneurs loans on the grounds of lack of guarantees and collaterals or of a track record of profitable investments. These social entrepreneurs access to risk capital is limited. The long complicated procedures and inordinate delay in obtaining bank loans often deter these entrepreneurs from obtaining the loans. Since the banks lack expertise in identifying, selecting and financing social enterprises they are unwilling to provide social venture capital to the social entrepreneurs due to the economic and technical risks and uncertainties that underlie the innovation process.
Social entrepreneurship is an emergent issue in the UK, and education and training providers in the various universities have introduced social enterprise as a course in their curriculum. This is a vital course and it helps students do a mixture of classroom and hands on learning, covering subjects such as analyzing a changing society; understanding the public sector and profit re-investing organization; funding and financing; recruiting and staffing and trend and innovations. According to the students the course has given them the support they needed to get the business off the ground and they believe that without it they could not have made the social enterprise business work.
Banks should also realize that they are providing social venture capital to the right entrepreneurs since this course is not open to just anyone. Those who apply for it have to undergo an intensive testing process to ensure they are the right entrepreneurs. They are also asked to demonstrate previous commitment to social change and they have real potential to setup and sustain a social enterprise.
Banks should be willing to provide social venture capital to social entrepreneurs with a Bachelor of Arts in social enterprise since while in university they were privileged to work with experts in private and social business to progress their idea and work together to discuss issues and barriers to development of their companies as well as go on visits to a variety of enterprises to see them in action. In addition the students do have good mentors and they do hope to come out with full trajectory of where the business is going. The course works well for them since it teaches strong business skills in a social context. The students learn how to optimize funds and get returns for social businesses, how to scale up quickly and franchise. The students do believe that with good intention, personal drive and good business skills one can go a long way in changing the world.
Banks should identify the areas of gap in credit delivery systems and fill them through devising appropriate new schemes and implement them to provide credit to Social entrepreneurs. Banks should also access how favorable the projects are even if the entrepreneur has limited assets on which security can be pledged against, since valuable projects may go unfunded due to banks being unable to evaluate them effectively.
Social enterprises with shorter banking relationships should go to banks where branch managers have greater authority to make adjudication decisions since they are more likely to lend startups and small businesses as opposed to large hierarchical banks which are associated with long, complicated procedures and inordinate delay in processing the loan.
The government has to make it a matter of policy that financial assistance made available to social entrepreneurs, especially the small enterprises and startups on easy terms and with hassle-free procedures. Credit to social entrepreneurs is a prime input for their sustainable growth and its availability is thus a matter of great importance.
Social entrepreneurship being an emergent issue in the United Kingdom, education and training providers have realized the essence of providing Bachelor of Arts in Social Enterprise. People of different ethnicities and ages have enrolled for this course and they do a mixture of classrooms and hands on learning, covering subjects such as analyzing a changing society; understanding the public sector and profit reinvesting organization; co-operative and mutualizing; funding and financing; recruiting and staffing and trends and innovation. Banks should therefore provide the graduates with social venture capital in order for them to further their social and environmental goals hence changing the world.
Students who have enrolled for the Bachelor of Arts in Social Enterprise, alongside other informal courses run by small organizations and masters program in social enterprise are privileged to work with experts in the private and social businesses to progress their ideas and work together to discuss issues and barriers to the development of their companies as well as go on visits to a variety of social enterprises to see them in action. Most of them do have good mentors and the course works so well for them as it does teach strong business skills in a social context. Through this experience it is evident that the students do come out of the various institutions with full strategy of where the business is going. Therefore, banks should not remain adamant in the provision of social venture capital on allegations of the economical and technical risk and uncertainties that underlie the innovation process.
Banks should also note that the course on social entrepreneurship is not just open to anyone. Applicants to the various institutions have to undergo an intensive testing process to ensure they are the right entrepreneurs. The applicants are always required to demonstrate previous commitment to social change and they have real potential to set up and sustain a social enterprise. Therefore the banks should be assured that they are providing social venture capital to the right entrepreneurs.
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