A Qualitative Analysis Of Debt Financing Criteria And Gender Differences

Gender Differences in Debt Financing Criteria

Question:

Discuss the various criteria and processes involved in the various lending and borrowing activities in a bank.
 

The purpose of this report is to draw a qualitative research analysis focusing on comparison and differences in debt financing criteria based on the gender. The first part of the research gives a detailed analysis in terms of volume financed to the male applicants and the female applicants. The research analysis shows the complex relationship with regard to amount of loan amount disbursed to the male and female entrepreneurs. The study also shows the perceived notions of the bank officials lending the loan amount while grating of credit to the female entrepreneurs. The report also shows an analysis of discrimination in mortgage lending based on racial grounds from a case study conducted at Columbus in Ohio. The study shows how the various lending institutions treat the black loan applicants in a different way than when the white neighborhood applies for a loan. The second portion of the report lays emphasis to compare whether the differences in gender is the result of supply based discrimination created by the bank lenders and financing lesser credit to the female entrepreneurs due to increased amount of risk. It also studies whether the criteria of debt financing are the result of the structural differences or the scale of operation of the business setup owned by a male or female entrepreneur (Saparito 2013).

According to Eddleston (2014), in order to draw a critical analysis of the differences in the debt financing decisions, it is important to understand the role of women and their practice of running a business concern. In U.K. several economic development institutions have played a crucial role to boost self-employment among women and the urge to start a business as an independent entrepreneur. Although the large increase in the role of the female entrepreneurs the statistical evidence does not support the increment. In the U.S. the trend of women entering into entrepreneurship is lower in compared to U.K. and European countries (Cozarenco and Szafarz 2015).

The researcher investigating the difference in financing due to gender factor are less likely to borrow external finance due to several reasons. The first reason is the difference in the structure of the business owned by a male or female entrepreneur. The second difference is related to the gender discrimination in the supply of credit. In various research studies based on experiment, it was found that the loan officers have evaluating criteria for funding of the credit and the study show that the differences in terms of the credit disbursed by the loan officers are to the disadvantage of the female entrepreneurs. The study also suggested that women entrepreneurs have lesser requirement for credit due to smaller size of business owned in compare to male entrepreneurs. Studies have also suggested that the discrimination in debt financing is based mainly in the size of the business owned rather that the gender of the loan applicant (Brana 2013)

Studies also show that the discrimination aspect may also be an outcome of the socialization process from childhood. According to the research the gender socialization process has an impact on the bank officials, credit controller and even brokers. Gender socialization process has a direct influence on the individual’s perception of asses a borrower and the process used for the negotiation process for loan disbursement (Milanov 2015). 

Racial Discrimination in Mortgage Lending

The study conducted at Columbus, Ohio states that the probability of the loan being rejected for the black loan applicants was much higher than the white mortgage applicants. It was also found that the white applicants had a higher probability of loan being denied in the minority communities. The geographic contingency states that the racial nature of discrimination is place-based.

The research is based on a major clearing bank based in the U.K. shows that the difference in the debt financing decision based on the gender of the applicants. The data collection was done through interview process consisting of 16 male lpan officers and 19 female loan officers. A four page loan application form was designed for the applicants seeking finance for opening a new restaurant business. In order to avoid any biasness, the photograph and the last name of the applicants was removed. The name given the loan officer was Emma Jones and Jack Jones. The methodology was composed of two stages one being verbal protocol analysis and other being focused groups (Cesaroni 2013)

The verbal protocol analysis deals with the reaction of the respondents while they were performing a job. The various data collected on the thought process, usage of words was then later used for transcription and analysis. The data was collected through interview process in three different banks. The interview involved 16 male lending officers and 19 female lending officers’ asses both the male and female loan applicants. The next stage involved analysis of the focused group to order to enhance and prove the validity of the experiment (Vershinina et al. 2015).

The racial discrimination case study is based on the seven – country in Ohio metropolitan area. In order to study the geographical contingency and impact on the race bases lending outcomes as per Home Mortgage Disclosure Act (HMDA) for individual loan applicants has been used. The research was conducted as a purpose to study the multi level analysis of the effect of race in lending decisions. (Brown et al. 2013). 

The verbal protocol criteria of analysis of the various loan applications provided a total of 44 codes for analysis. The five core criteria for analysis involves personal attributes of the applicant, the policies of the loan, the nature of the business owned, the assumptions on the determining written plan prepared by the credit officers. The next set of criteria was to compare the findings based on the sex of the lender and the borrower (Thébaud and Sharkey 2014).

The qualitative findings of the research based on the interview process shows the parameters for differences in the decision making process. The male credit officers were found to be providing more positive set of comments than the female loan officials. Most of the female credit officers were self contained in granting of credit than the male loan officers and they did not provide any decision regarding approval of the loan. The statistical findings through quantitative analysis showed that the male credit officers were more liberal in their decision making process, except for few cases were their involved resistant decision in approval of the credit requirements. The overall analysis suggests that although a significant number of loan applicants were supported by the decision of approving of the credit, only few credit officers were ready to finance the loan without getting an appointment with the loan applicant and meet them in the first place. The desire to meet the borrower party was essential for further processing of the loan and the observations are paramount for the second stage of the data collection process (Derera et al. 2014).

Methodology

According to Carter et al. (2015), the lending process can be viewed as a process of supply chain which is driven by the professional introducers approaching the credit officers for requirement of the loan. The application of the various potential loan borrowers are screened by the designated bank officials. A study conducted on the lending process base on the sex of lender and the applicant showed female loan officers were more likely to consider their relationship with the professional introducers of the loans of the entrepreneurs. Among the selected female loan officers some of the officer reported of the down side of the unavailability of the lack of the female professional brokers. The verbal protocol analysis followed by focused group on the sex of the loan applicants and the lender shows the male loan officers were more likely to discuss on the requirement of the credit, the planning of the business operations and the significance of building a relationship with the borrower. In case of the female loan officers the officials were more likely to discuss on the process of credit disbursement and building a rapport with the professional introducers of the loan rather than the individual loan applicants. The female credit officers were also more concerned about the amount of credit which was to be granted to the borrower.

The various statistical outcomes of the racial discrimination study show that the neighborhoods of Ohio which have more of White population get a better preference while applying for a loan. On the contrary the minority community ruled mainly by the black has more preference for the black loan applicants. The findings also show the importance of Columbus’s demography. Based on series of statistical assumptions, the probability of a whites’ loan being rejected is fairly low. Although when the loan amount is small the denial factor for the white loan applicants is much higher. The relative drawback suffered by the black loan applicant is seen mainly, while a black applies for a loan in the white neighborhood. In the same way it is also observed that when a white applies for a loan from a black minority community the chances of small loans getting rejected is much more severe. (Hyra et al. 2013).  

Conclusions

The various aspects of the critical analysis on the process used in the bank lending decisions shows new findings on the impact of lending decision based on the gender and nature of entrepreneurship. From the various research methods covered in this report shows the traditional studies demonstrated that the chance of finances being confronted by the female loan officers was higher due to increased entrants of women into banking sector. Through various research analyses in this report it was observed that the female credit officers were more likely to give importance on having an appointment with the applicant and the marital status. The emphasis on the marital status was directly related to personal stability and a criterion for financial stability. The male applicants were considered to be more financially sound than the females. The various analyses for the racial discrimination shows the reason for discrimination in mortgage lending cannot be determined without understanding geographical contingent nature. But the traditional findings may not be having value on present economic situation. The black prove to be equally competent in meeting the requirements of financial institutions and tend to apply for more no. of home loans than the white.  

Reference List

Brana, S., 2013. Microcredit: an answer to the gender problem in funding?. Small Business Economics, 40(1), pp.87-100.

Brown, L.A., Webb, M.D. and Chung, S.Y., 2013. Housing foreclosure as a geographically contingent event: Columbus Ohio 2003–2007. Urban Geography, 34(6), pp.764-794.

Carter, S., Mwaura, S., Ram, M., Trehan, K. and Jones, T., 2015. Barriers to ethnic minority and women’s enterprise: Existing evidence, policy tensions and unsettled questions. International Small Business Journal, 33(1), pp.49-69.

Cesaroni, F.M., Lotti, F. and Mistrulli, P.E., 2013. Female Firms and Banks’ Lending Behaviour: What Happened during the Great Recession?. Bank of Italy Occasional Paper, (177).

Cozarenco, A. and Szafarz, A., 2015. Gender Biases in Bank Lending: Lessons from Microcredit in France. Journal of Business Ethics, pp.1-20.

Derera, E., Chitakunye, P. and O’Neill, C., 2014. The Impact of Gender on Start-up Capital: A Case of Women Entrepreneurs in South Africa. Journal of Entrepreneurship, 23(1), pp.95-114.

Eddleston, K.A., Ladge, J.J., Mitteness, C. and Balachandra, L., 2014. Do you see what I see? Signaling effects of gender and firm characteristics on financing entrepreneurial ventures. Entrepreneurship Theory and Practice.

Hyra, D.S., Squires, G.D., Renner, R.N. and Kirk, D.S., 2013. Metropolitan segregation and the subprime lending crisis. Housing Policy Debate, 23(1), pp.177-198.

Milanov, H., Justo, R. and Bradley, S.W., 2015. Making the most of group relationships: The role of gender and boundary effects in microcredit groups. Journal of Business Venturing, 30(6), pp.822-838.

Saparito, P., Elam, A. and Brush, C., 2013. Bank–Firm Relationships: Do Perceptions Vary by Gender?. Entrepreneurship Theory and Practice, 37(4), pp.837-858.

Thébaud, S. and Sharkey, A.J., 2014. Unequal Hard Times: The Influence of The Great Recession on Gender Bias in Entrepreneurial Investment. Working Paper.

Vershinina, N., Rodionova, Y. and Marlow, S., 2015. Does an Entrepreneur’s Gender Matter for Credibility and Financing of SMEs?. In Female Entrepreneurship in Transition Economies (pp. 87-111). Palgrave Macmillan UK.