Access to Finance and Entrepreneurship Development in Gambia

Introduction

Entrepreneurs require access to finance in Gambia, and yet finance is difficult for micro and small business enterprises (MSEs) and small and medium-sized enterprises (SMEs) to obtain for a variety of reasons: the legal and regulatory framework, which makes compliance and registration costly with fees anywhere between GMD 500 and GMD 10,000; prohibitive market transaction costs; substandard business development services; and a lack of savings mobilization and tight credit (Department of Social and Human Development, 2006). Medium enterprises typically employ more than five people and have an investment of GMD 150,000, but products that provide savings mobilization and credit delivery "cover only a small portion of the demand and need further improvements in order to address the recognized need for bigger amounts relevant to diverse economic activities" (Department of Social and Human Development, 2006, p. 11).

This research will use Asymmetric Information Theory (AIT) as the framework for explaining the difference in perspective between financiers and entrepreneurs, who have fuller access to information regarding revenue streams and opportunities for growth than do external financiers such as equity investors and lenders. AIT suggests that "smaller and younger firms tend to report higher financing obstacles than larger and older firms" while "imperfect information and high transaction costs are factors driving the limited access to external formal finance" by MSEs and SMEs (Jaabi, 2018, p. 66). As MSEs and SMEs make up a significant proportion of Gambia's rising economy, there is a need to ascertain the exact economic impact of financial access constraints.

Objectives: The objectives of this research are to examine the economic impact of access to finance in Gambia and its effects on entrepreneurship development.

Proposed Research Questions:

1. What are the key sources of finance for entrepreneurship development?
2. What are the challenges of access to finance on entrepreneurship development?
3. Will the promotion of entrepreneurship development create employment opportunities, increase labor productivity, and advance growth in the economy?

Proposed Hypotheses:

1. Lack of access to finance is a challenge to entrepreneurship development in Gambia.
2. The absence of good trading infrastructure, modern technologies, and a sufficiently large market negatively affects the prospects of entrepreneurship growth and development.
3. The high eligibility thresholds on conditional qualification criteria for loans are a major contributing factor to the lack of startup businesses.

Theoretical Framework

The theoretical framework used in this research is based on Asymmetric Information Theory, which posits that there is an unequal balance of information between parties and that one party has greater access to, or knowledge of, a particular subject than the other (Auronen, 2003; Cressy, 1996; Fazzari & Athey, 1987; Grossman, 1981). Fazzari and Athey (1987) have noted that "financial variables affect capital spending because of asymmetric information in capital markets" (p. 481). However, Fazzari and Athey (1987) also point out that cash flow and interest expenses impact financing arrangements as well.

This is a problem for SMEs and MSEs in Gambia because many of them do not meet the requirements for regulatory compliance that lenders rely upon to mitigate lending risk (Jaabi, 2018). The reason they do not meet these requirements is not always because of poor revenue streams or limited growth opportunities, but simply because they do not register with local authorities, properly record transactions, or maintain accurate accounting (Jaabi, 2018). This lack of adherence to professional business standards prevents them from being seen as suitable clients by lenders. Thus, entrepreneurs may have firsthand information that growth opportunities exist and that cash flow is positive, but their records and data are not maintained in a way that can be shared with lenders (Jaabi, 2018). Financiers would be willing to lend if SMEs and MSEs could offer collateral, but most cannot (Rocca, Rocca & Cariola, 2009), and thus the information asymmetries remain an obstacle (Stiglitz & Weiss, 1981).

Problems Regarding the Lack of Access to Finance for Businesses

The lack of access to finance for businesses in Gambia is a major constraint to growth and economic development (Berger & Black, 2011). First, the Business Registration Act of 1990 does not adequately take into consideration the needs of SMEs and MSEs (Department of Social and Human Development, 2006). Simply registering a business is complicated in Gambia; as the Department of Social and Human Development (2011) notes, "the business registration process is still centralised in the Greater Banjul Area and is therefore very difficult for rural entrepreneurs to access these services" (p. 8). Registration can moreover be a process that takes up to four weeks — roughly an entire month's worth of work for an entrepreneur (Department of Social and Human Development, 2006). The registration fees, as already noted, are also exorbitantly high.

Second, poor infrastructure — including roads and access to markets — represents a prohibitive transaction cost that prevents SMEs and MSEs from reaching their full growth potential. The Republic is therefore not only discouraging small businesses from seeking compliance by making the process unnecessarily burdensome, but it is also failing to provide the accommodative infrastructure needed to facilitate economic growth. This makes it more difficult for businesses to reach alternative markets, demonstrate growth, and obtain financing (Department of Social and Human Development, 2006).

Third, informal SMEs — businesses with fewer than five employees — make up 65% of the clientele for the microfinancing industry in Gambia (Department of Social and Human Development, 2006). Yet, because many of these SMEs are non-compliant with regulations due to registration and bookkeeping difficulties, they cannot obtain the loans they need, which inhibits growth. The high-risk profile of these businesses makes them unattractive to lenders and investors. For the sake of development, Gambia needs businesses that can grow, and the challenges are interwoven and complex, involving a need for improved infrastructure, improved registration methods, improved bookkeeping, and a systemic approach to addressing the asymmetric information problem (Jaabi, 2018).

Methodology

This study will use a mixed-methods research design, which is appropriate for studies seeking a stronger and more robust understanding of a problem and how to address it (Bergman, 2008). Qualitative data will be obtained through interviews with business owners in Gambia. Quantitative data will be obtained through surveys of business owners and through secondary sources of information, including published government data such as the "Report of Gambia: Entrepreneurship Promotion and Microfinance Development Project" by the Department of Social and Human Development (2006) and other published materials.

The qualitative data will be analyzed and interpreted using thematic analysis and AIT. The quantitative data will be measured for frequency of distribution with respect to the variables relating to the research questions, namely:

1. Sources of financing and whether business owners feel they have adequate access to them
2. Challenges of access to financing
3. The promotion of economic development

The interviews will be used to discover the issues most important to business owners in Gambia with respect to financing challenges. Once those themes are identified, the survey will be constructed to assess the frequency with which business owners are impacted by these challenges and then distributed to business owners. The survey will use a Likert scale measuring system to provide the ordinals for determining frequency distribution, which will be conducted using SPSS software. The sample size for the interviews will be 12 business owners from Gambia, and the anticipated sample size for the survey will be 100 business owners from Gambia. Participants will be selected randomly and through snowball sampling using contacts within Gambia.