Black and Bangladeshi owned businesses are the most likely to be refused credit, facing up to four times as many refusals as white owned businesses.
Warwick Business School researcher Dr Stuart Fraser examined the small business credit market using data from the UK Survey of Small and Medium Finances (UKSMEF).
He found that in particular Bangladeshi and Black owned firms are several times more likely to be denied loans than Indian and White owned businesses. The survey found that 36% of Black African firms had been denied loans compared to 29% of Black Caribbean, 20.6% of Bangladeshi, 12.2% Pakistani, 7.3% Indian, and 8.2% white owned businesses.
At face value, these results would seem to be an indication of ethnic discrimination, however Dr Fraser found that a further analysis of the loan denials and interest rates pointed to differences in creditworthiness rather than ethnic discrimination as an explanation for poorer EMB credit outcomes. In particular, more than half of Black African firms (55.7%), and 40.6% of Black Caribbean firms, exceeded their overdraft limit or missed loan repayments versus about one in four (23.3%) of White owned firms. – and it is this factor that appears to account for their higher loan denial rates.
The research found that one clear reason for this much higher incidence of missed loan repayments and exceeding overdraft limits (financial delinquency) was the much younger age of the Pakistani, Bangladeshi and Black owned firms compared to Indian and White firms. Black African owned businesses averaged 6 years, Black Caribbean 6.9, Bangladeshi, 6.5, Pakistani 8.3, Indian 14.2, and White owned 18.7 years. Other key reasons for financial delinquency include the business owner lacking a financial qualification or suitable financial advice and the business already having too much debt. In the case of Black African firms the research also points to cultural differences as a possible explanation for higher delinquency rates.
The research also found that Black Caribbean firms in the UK are less likely to apply for loans than White owned businesses due to fears of rejection based upon discrimination.
Dr Fraser points to the increasing use of ‘arms length’ credit and behavioural scoring systems, which do not allow transactions to be tainted by dubious judgements based upon ethnic perceptions by loan officers. He notes that scoring systems may explain the absence of racial bias, but ironically, they may also be responsible for misperceptions of racial bias since the reasons for rejection are not usually made clear to the applicant in these cases.
Dr Fraser says “Improvement in information flows between finance providers and businesses about the criteria used to make credit assessments including providing the reasons for rejection would help tackle the misperceptions of discrimination. In particular, finance providers should make it more clear to EMBs that defaulting on a loan or exceeding an overdraft limit could have adverse consequences for future credit.”
This research highlights a number of factors which need to be addressed in order to reduce ethnic variations in loan denial rates: lack of financial skills and advice; poor financial performance; and ethnic and cultural differences. Targeting EMBs for assistance with skills advice may help reduce delinquency rates and improve access to finance. This, together with finance providers investing more in their relationships with Black firms could cause significant reductions in dissatisfaction.
Peter Dunn | alfa
New study from the University of Halle: How climate change alters plant growth
12.01.2018 | Martin-Luther-Universität Halle-Wittenberg
Disarray in the brain
18.12.2017 | Universität zu Lübeck
On the way to an intelligent laboratory, physicists from Innsbruck and Vienna present an artificial agent that autonomously designs quantum experiments. In initial experiments, the system has independently (re)discovered experimental techniques that are nowadays standard in modern quantum optical laboratories. This shows how machines could play a more creative role in research in the future.
We carry smartphones in our pockets, the streets are dotted with semi-autonomous cars, but in the research laboratory experiments are still being designed by...
What enables electrons to be transferred swiftly, for example during photosynthesis? An interdisciplinary team of researchers has worked out the details of how...
For the first time, scientists have precisely measured the effective electrical charge of a single molecule in solution. This fundamental insight of an SNSF Professor could also pave the way for future medical diagnostics.
Electrical charge is one of the key properties that allows molecules to interact. Life itself depends on this phenomenon: many biological processes involve...
At the JEC World Composite Show in Paris in March 2018, the Fraunhofer Institute for Laser Technology ILT will be focusing on the latest trends and innovations in laser machining of composites. Among other things, researchers at the booth shared with the Aachen Center for Integrative Lightweight Production (AZL) will demonstrate how lasers can be used for joining, structuring, cutting and drilling composite materials.
No other industry has attracted as much public attention to composite materials as the automotive industry, which along with the aerospace industry is a driver...
Scientists at Tokyo Institute of Technology (Tokyo Tech) and Tohoku University have developed high-quality GFO epitaxial films and systematically investigated their ferroelectric and ferromagnetic properties. They also demonstrated the room-temperature magnetocapacitance effects of these GFO thin films.
Multiferroic materials show magnetically driven ferroelectricity. They are attracting increasing attention because of their fascinating properties such as...
08.01.2018 | Event News
11.12.2017 | Event News
08.12.2017 | Event News
19.01.2018 | Materials Sciences
19.01.2018 | Health and Medicine
19.01.2018 | Physics and Astronomy