4th International Conference on Humanities, Geography and Economics (ICHGE'2013) Oct. 6-7, 2013 Dubai (UAE)

The Impact of Lack Financial Services on the Growth of Libyan Small Businesses

Mukhtar E. Eltaweel, and Robin Bown

finance more prominent. There is often a tendency to use Abstract—This article is about the impact of lack financial informal methods of finance where the access to formal services on the growth of Libyan small businesses. It is worth noting methods is constrained. The issue of time is important in the from the outset that the situation in Libya has changed as a result of provision of finance, and it may be that this is what the uprising. There are number of aspects of research that will lead to distinguishes the formal sector. The importance of time seems conclusions about the Libyan economic development. In this study, the findings have illustrated that small businesses in Libya face to focus around the issue of responsiveness; the speed at which problems in raising equity capital, due to government policy and also finance can be provided. due to small businesses themselves. The Libyan financial market is It has been proposed that SMEs in Libya, and have poor relatively small and is dependent on just the banking sector and a managerial, financial and marketing capabilities [6]. The same number of insurance companies. The Libyan stock market has been source notes that SMEs also lack economies of scale probably recently established and only lists a small number of large companies. due to the dominance of the petrochemical sector which It is reasonable to say that Libyan small businesses suffer from a lack of external sources of equity finance. The absence of venture capital accounts for 70% of GDP. institutions contributes to the equity gap in the Libyan financial A. The issue of access to financial services market, while in some countries formal and informal venture capital is considered one of the main sources of equity funding for small It has been said that in developed and developing countries businesses. Findings in this study show that the absence of venture the main issue for small businesses is how they access finance capital institutions is widely contributed to increase the equity gap in [7]. Beck et al., (2008) pointed out that this issue is still being the Libyan financial market. debated by the majority of academic researchers and policy makers in different world economies. Moreover, the World Keywords— Financial services, Libyan small businesses, Libyan Bank report mentioned that there are some factors that have banking sector. Libyan Financial market, venture capital institutions. contributed to an increase in these arguments [8]. Firstly, there is a quantity of empirical evidence which suggests that the I. INTRODUCTION expansion of access to finance may result in reducing poverty ESEARCH into small businesses remains an area where in developing countries. Secondly, the interest in small R there is a lack of deep understanding of the dynamics of business access to finance may result in financial development successful expansion [1]. How small businesses develop is of that leads to growth. Thirdly, unlike developed countries, there interest to both developed and developing countries. In the is a widespread lack of access to financial services in case of Libya the situation has changed dramatically in the last developing countries [8]. Consequently, banks in the Arab few years. The authors believed that the social attitudes region have established targets for the development of their unlikely to change radically over the short term. activities in the SME segment. However, their emphasis on The situation in Libya is that it is a relatively wealthy SME activities is rather limited. Lending volumes are still not country; the sixth in GDP per capita in Africa [2]. It is in the very large [1]. top third of countries according to the UN human development Ganbold (2008) defined access to financial services as index [3], one of the smallest in the economic region. This improving the degree to which financial services are accessible economic development has created a structure where there are to all at a fair price. In measuring the use of financial services fewer large and foreign owned firms and a larger number of it is easier when they can be observed, however, use of small firms particularly in the service sector. It has been financial services is not always the same as access. In addition, observed in a study of African countries that the factors of size access basically relates to the supply of services, while the and ownership of firms are the key quantitative determinants determinants of use are supply and demand taken together [8]. of financial constraints [4]. The provision of finance is often Figure 1 below shows the difference between use and access to cited as a constraining factor in transition economies [5]. The financial services. There are important attributes shared among issues of compliance and collateral often prefer larger firms. non-users, and it is easy to differentiate the users of financial These issues often make the use of informal methods of services from nonusers. However, non-users of financial services may have religious or cultural reasons for avoiding Mukhtar E. Eltaweel, Misurata University- Libya. e-mail: [email protected] debt, or may not see any need for finance. Furthermore, non- Robin Bown, Gloucestershire University. e-mail: [email protected]. users may be able to access financial services, but they do not

56 4th International Conference on Humanities, Geography and Economics (ICHGE'2013) Oct. 6-7, 2013 Dubai (UAE) have any plan for growth or investment. On the other hand, the be not bankable because they present too high lending risk and involuntarily excluded cannot access financial services, despite do not have enough income. The second involuntarily demanding them. The World Bank report added that there are excluded group relates to that part of the population who might diverse groups within the involuntarily excluded. The first be discriminated against on religious, social, or ethnic group is households and enterprise businesses. According to grounds. commercial financial organisations this group is considered to

Fig. 1 the differentiation between access to finance and use. Source: [8].

The third group is excluded because of the informational semi-structured interviews with five senior lending managers and contractual framework that might block financial in the banks. institutions from extending services to several population groups, also in order to be commercially viable they might III. FINDINGS need prohibitively high costs. Eventually, the characteristics of The findings of this study show that both government and the services might be unsuitable for certain groups of people the central bank tightly control the banking sector in Libya, and the price of financial services may be too high. where competition is almost absent. A lack of experience and qualified workers has a negative effect on daily dealings with II. METHODOLOGY customers. The banking sector in Libya still only provides In this study, sample has been selected according to traditional retail services and limited credit facilities. The interviews conducted in Libya. Therefore, two groups were relationship between small businesses and banks is strongly identified as stakeholders for this research. The first group dependent on personal relationships and family ties. Findings consists of twenty seven small private companies and the show that personal relationships and ‘wasta’ are highly second group consists of a number of national banks based in important in the relationship between banks and small Libya. The sample was selected from the business population businesses. A lack of transparent relationships contributes based in both the capital city Tripoli and Misurata , the third widely to the increase in the gap between small businesses and city of Libya. The interview data collection for this research is banks. divided into two phases: the first phase consists of semi- Some of these issues may well be shared with other structured interviews (face-to-face) with twenty seven owner– developing economies and, more specifically, with other managers of small businesses. The second phase consists of countries in the Arab world [1]. However, it is suggested here

57 4th International Conference on Humanities, Geography and Economics (ICHGE'2013) Oct. 6-7, 2013 Dubai (UAE) that the combination of long-term and tight central control of venture capital funding is increasing the financial gap in the the economy, the institutional immaturity of the financial small business field. Furthermore, the absence of venture services sector and the strength of family and tribal ties make capital institutions has also significantly contributed to an Libya and extreme case in terms of the relationships between increase in the equity gap in the Libyan financial market. small businesses and banks. However, in spite of all steps that have been taken by the Access to financing is heavily influenced by existing Libyan government to support and develop the financial conditions in the environment in which financial institutions sector, small businesses still face difficulties in accessing and small businesses operate. Government plays a critical role funding and financial services. The Libyan financial sector is in creating a climate (an environment) that can lead to still weak and unable to provide even simple facilities to their facilitate finance for small businesses and also can govern and customer compared with neighbouring countries lead the way within which financial institutions and businesses can interact to create this environment. The government in REFERENCES Libya is not playing its role in providing the environment [1] Jose Antonio Pedrosa-Garcia (2013) Access to Finance by Small and (facilities) that drives economic development and activities to Medium Enterprises in the Arab Region: Policy Considerations, encourage both banks and small businesses to work together ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA (ESCWA), E/ESCWA/EDGD/2013/WP.1, 6 August 2013. and contribute to the economic growth of Libya. Whilst [2] OECD 2010, Statistics: African Economies; Basic indicators, Paris neighboring countries such as Tunisia and Egypt have [3] UNDP (2010 United Nations Development Programme, Human achieved advanced steps in terms of banking services, the Development Report 2010, Palgrave Macmillan, Basingstoke, Hampshire. Libyan banking sector is still weak and unable to provide even [4] Kounouwewa, J. J., & Chao, D. D. (2011). Financing Constraints basic services. Although a number of steps have been taken by Determinants in African Countries. International Journal of Applied the Central Bank of Libya and the government in order to Economics & Finance, 5(1), 30-45. [5] Hashi, I, Krasniqi, B A,. (2011), "Entrepreneurship and SME Growth: reform the banking sector, the findings of this study show that Evidence from Advanced and Laggard Transition Economies", the Libyan banking sector is still under the control of the International Journal of Entrepreneurial Behaviour & Research, Vol.17 government and the Central Bank of Libya. Libyan banking Iss: 5. [6] ADB2010, African Development Bank, Technical Assistance for Small services are still complicated and use outdated systems in their and Medium Enterprise Development: Appraisal Report, Tunis. operation. As discussed elsewhere, owner-managers of small [7] Claessens, S. (2005). Access to financial services: a review of the issues businesses face more difficulties when trying to deal with and public policy objectives. World Bank Policy Research M. 3589. banks. The findings of the study show that owners of small [8] Beck, T., Demirguc-Kunt, A., & Martinez, M. S. (2008). Bank financing for SMEs around the world, drivers, obstacles, business businesses were unable to easily access bank services without models and lending practices. Washongton: World Bank Development having a personal relationship with the bank. Thus in Libya the Research Group Finance and Private Sector Team personal nature of being in business was further strengthened. Findings show that small businesses in Libya might also be constrained by the bureaucracy of the institutions. The centralisation, the huge amount of documents, and the lengthy procedures were the character of the majority of the institutions in Libya. Participants complained about the procedures of the banks; the majority of them thought that bureaucracy was one of the main obstacles facing the growth of their businesses. Although the Libyan government has taken a number of steps to enhance the financial sector, and has become more interested in making the financial sector more effective, the stock market in Libya was only established in 2006, and it is only for large companies, while the Libyan small business sector suffers from a lack of external finance sources such as equity funding. The findings of the study show that owners of small businesses had a very low level of awareness about equity funding and stock market operations. It is reasonable to suggest that this not only has a major impact on the availability of external equity funding but on long-term business planning in terms of the funding of acquisitions and of harvesting. Whilst venture capital is one of the most important sources of small business growth funding, the findings of the study show that venture capital funding is not widespread in the Libyan financial market. Lack of awareness and knowledge about

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