The role of gender in the assessment of applications for finance.

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Master Thesis

The role of gender in the assessment of

applications for finance.

Dirk Baron

Rijksuniversiteit Groningen

Master of Business Administration

Small Business and Entrepreneurship

August 2011

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1. Introduction

Access to finance is critical to entrepreneurs since it affects the performance and survival of their firms (Marlow & Patton, 2005; Musso & Schiavo, 2008). The lack of capital is also often cited as the reason for business failure (Coleman, 2000). In the literature there is an ongoing debate about the existence of barriers that entrepreneurs face when they are attempting to acquire capital. One important aspect of this debate is the difference in barriers that male and female entrepreneurs face (Coleman, 2000; Marlow & Patton, 2005; Alsos Isaksen & Ljunddgren, 2006; Muravjev, Talavera & Schäfer, 2009). The discussion about barrier female entrepreneurs face is becoming more important in the Netherlands since the absolute number of female entrepreneurs is still growing (EIM, 2011). Although the percentage of female entrepreneurs is stable at 32 % since 2000, the absolute number of female entrepreneurs is still growing because the total number of entrepreneurs is growing. Also the share of women in the total number of start-ups in the Netherlands has grown from 25% to 35% during the period 2000-2009 (EIM, 2011). Still, this is less than the high growth in labor force participation which more than doubled in the years between 1975 and 2006 from 31% to 69% (Euwals, Knoef & van Vuuren, 2011). In other countries like Great Britain and the US female entrepreneurship is (or there is the perception that it is) still growing (Wilson, Carter, Tagg, Shaw & Lam, 2007). On the other hand did Carter, Shaw, Lam & Wilson (2007) found that although it is an popular issue in the UK due to the large amount of policies concerning it and the perception that there is a large scale expansion in female entrepreneurs, the growth in female entrepreneurs is modest or even non-existent. In the literature it is indicated that there should be more understanding of the gendered process of new business financing. (Alsos et al., 2006). Also most of the research on this topic has been done in North America (Hill, Leitch & Harrison, 2006). This research was therefore initiated in the Netherlands among one of the largest finance suppliers of the Netherlands.

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firms, they might not be as successful as they could be. Undercapitalization at start-up is a major problem for firms that prevents them from reaching their full potential (Alsos et al., 2006; Carter & Rosa, 1998). According to Fairlie & Robb (2009), businesses that start with less capital much more likely to fail and they score also less on other performance measures like growth, profits and employment. This may be also the problem for female entrepreneurs.

As will become clear in the literature review there are many inconsistent findings in the literature. This raises question on where different treatment of female entrepreneurs (or the perception that it is happening) comes from. It is plausible that in the process in which the loan applications are assessed happens something that might indicate a different treatment or something that female entrepreneurs might perceive as discrimination against them. This leads to the following research question:

Which role does the gender of the applicant play in the assessment process of applications for finance?

2. Literature review

In the literature there is an ongoing debate about the existence of barriers that female entrepreneurs face in their access to external capital. The core of the debate mainly focuses on one big issue: Are female entrepreneurs discriminated when they are searching for capital or not? Although there has been substantial research about this topic, evidence about discrimination by banks based on the gender of the entrepreneur is at least ambiguous (Marlow & Patton, 2005; Alsos et al., 2006; Muravjev et al., 2009). Still there is a persistent view in the popular media, among researchers and female entrepreneurs themselves that woman do face barriers based on their gender when they are searching for capital. This perception of female entrepreneurs is mentioned by several authors (Wilson et al, 2007; Carter et al, 2007). According to Coleman & Robb (2009) do female entrepreneurs report in several studies that they have problems with acquiring bank loans and dealing with lenders although none of the studies indicate that woman are more often turned down than men in the application for a loan.

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female-owned firms in the Netherlands in 2010 were searching for external finance. This is in line with the total percentage of the SME’s that were looking for external finance. Although female entrepreneurs were searching for relatively small amounts of financing, the success rate among female entrepreneurs was 74%, which was much higher than the success rate of 53 % among the total number of SME’s. On the other hand do Coleman & Robb (2009) and Treigel & Scott (2005) indicate that woman are more reluctant to apply for a loan because they anticipate denial. This is one of the main reasons why investigation into this subject is necessary. Women may forego on promising opportunities because they do not want to apply for loans due to perceived discrimination against them. Also for banks it is important because they may miss business opportunities.

According to Muravjev et al. (2009) and Bellucci, Borisov and Zazzaro (2010) there are two types of discrimination. The first type of discrimination is derived from the classical model of Becker in his book on the economics of discrimination. (1957). Here discrimination arises because the lender does not want to be associated with certain groups of borrowers and is therefore willing to pay a price.The second type of discrimination is statistical discrimination. This consists of a statistical model where borrowers’ demographic characteristics are correlated with their creditworthiness. Lenders therefore use the former as an proxy to assess the risk associated with the loan (Phelps, 1972; Arrow, 1973). The literature has sought to explain the differences between male- and female-owned in the amount of external finance that is used in three ways (Orser, Riding and Manley, 2006; Carter et al, 2007) namely characteristics of female-owned firms (the second type of discrimination or statistical discrimination), discrimination on the supply side of capital (Becker-type discrimination) and the demand side factors of the female-owned firms. This last explanation is not the consequence of discrimination but rather of the differences in preferences between male and female entrepreneurs with regard to the amount of risk and debt associated with different ventures (Carter et al, 2007). In the literature review that follows I will discuss these three main explanations.

2.1. Characteristics of female entrepreneurs (Statistical discrimination)

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growth (Haines et al, 1999; Coleman, 2000; Orser et al., 2006; Zinger, Lebrasseur, Robichaud & Riverin, 2007; Coleman & Robb, 2009). This results in higher risks for banks and also a shorter relationship with female-owned firms. Orser et al. (2006) found that female entrepreneurs have significantly less business experience, much shorter relationships with their financial institutions and they are also less likely to pursue a growth strategy. According to Petersen and Rajan (1994), the length of the relationship affects both the availability and the price of the credit due to a lack of information like credit history and track record on performance in the past. These are factors that might explain why female-owned firms are more likely to face barriers when they are trying to obtain capital. Due to the relative smallness of their firms, banks may perceive female-owned firms as less attractive than the relatively bigger male-owned counterparts because the costs for monitoring and evaluating the firm may not outweigh the revenues of the small loans (Haines et al., 1999). Haines et al., (1999) also explain the higher turndown rates, that are in the literature generally explained as gender bias, by the fact that female-owned businesses cannot reach the minimum threshold that is required by banks when applying for a loan due to characteristics that these firms have. Riding and Swift (1990) and Bellucci et al. (2010) found that female-owned firms were required significantly more collateral than male-owned firms. Although this could point to the possibility of discrimination, Coleman (2000) stated that lenders require more collateral from potentially riskier borrowers like smaller borrowers, unincorporated firms and service firms that lack specific collateral. Because female-owned firms are over-represented in this last group, it might be more difficult for female entrepreneurs to acquire capital or at the same price as men.

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strong emphasis on accounting figures when assessing a loan application because these are good indicators if the company will be able to operate effectively. If the accounting figures of female entrepreneurs are not good due to bad performance, female entrepreneurs may be less able to secure a loan. It can also be argued that due to undercapitalization female-owned firms perform worse than male-owned firm. This could lead to a vicious circle where female-owned firms will structurally underperform (Constantinidis et al, 2006).

Another characteristic of female entrepreneurs is that they often operate in certain sectors within the economy. In the Netherlands female entrepreneurs are overrepresented in sectors such as retail, services and healthcare, public administration and education. On the other hand, women are less represented in the construction sector (Verheul & Stigter, 1999; EIM, 2011) (For a complete overview of representation per sector see appendix I). Similar distributions of female entrepreneurs across sectors are found in other countries (Robb & Wolken, 2002; Marlow & Patton, 2005; Zinger et al, 2007; Fairlie & Robb, 2009; Coleman & Robb, 2009;). These sectors are less capital intensive and therefore female entrepreneurs might on average use less capital than men. Also the crowding in these sectors might explain the lower performance of female-owned firms due to the high competition as a result of this crowding. Reasons for this distribution can be found in the fact that women often have low-status and low skill work and this predisposes them in these areas of business when they start their own business (Marlow & Patton, 2005). Another reason that is put forward here is the fact that females have less or another type of education. Woman often follow social and economical studies where men are often more technical educated. (Marlow & Patton, 2005; Fay & Williams, 1993; Verheul & Stigter, 1999). Education of the applicant plays an important role when female entrepreneurs are searching for finance (Fay & Williams, 1993; Constantinidis et al, 2006). Having a degree signals to the loan officer that the female entrepreneur is more dominant and persisting, in other words has more masculine characteristics (Marlow & Patton, 2005). Based on this the loan officer may be more willing to provide a loan. This is only true for a certain group of females and not the entire population (Marlow & Patton, 2005).

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firms have the characteristics that are described above. Although this is not discrimination explicitly against females, they may be the victims of it since they are not always able to change the characteristics they have.

2.2. Supply-side factors (Becker-type discrimination)

The second explanation is the possibility of discrimination on the supply side. These are the behaviors of loan providers towards female-owned firms and their preferences for certain types of firms (Fairlie & Robb, 2009). Marlow & Patton (2005) suggest that female entrepreneurs face negative stereotypes which are very difficult to escape and in which feminine characteristics are inferior to masculine characteristics. These stereotypes are social constructs which arise over time through a socialization process and they have a negative impact on the activities female entrepreneurs undertake (Gupta, Turban, Wasti & Sikdar, 2007; Marlow & Patton, 2005). The characteristics of the male stereotype are independence, aggressiveness, autonomy, instrumentality and courage whereas characteristics of the female stereotype are defined as expressiveness, connectedness, relatedness, kindness, supportiveness and timidness (Gupta et al, 2007). According to Gupta et al. (2007) is a specific kind of

stereotype gender-role stereotyping. This refers to which types of work and the characteristics that are supposed to be needed for these types of work are appropriate for either males or females. For example being female is more appropriate for nursing and servicing since

females have more communal qualities like kindness and relatedness according to gender-role stereotyping. On the other hand are males better suited for business environments because characteristics that are often associated with this environment like predatory and hostile are not associated with the female stereotype according to gender-role stereotyping. In general entrepreneurship is perceived as more masculine, where the behavior of entrepreneurs is seen as male and where entrepreneurial characteristics are also seen as male (Wilson et al, 2007; Gupta et al., 2007). This could lead to a disadvantage towards female entrepreneurs because they would have to establish more legitimacy than male entrepreneurs to be seen as good entrepreneurs (Blake, 2006). This is especially true in sectors that are dominated by males and this could have negative consequences for female entrepreneurs when they are seeking

finance. According to Sexton and Bowman-Upton (1990), in their research where they asked bank loan officers to score male and female entrepreneurs on typical entrepreneurial

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may suggest that bank loan officers may perceive female as less entrepreneurial because these traits are associated with successful male entrepreneurs. Buttner and Rosen (1988) found that women were significantly less likely to be identified on the dimensions that are commonly identified with successful entrepreneurs than men. They based this statement on a

questionnaire they mailed to 141 loan officers. Although this could suggest that these loan officers use stereotyping when they are assessing loan applications Buttner and Rosen (1989) also found that bankers are not influenced by gendered stereotypes when they are assessing loan applications and they are focused much more on the financial projections instead of the gender of the applicant when they determine the amount of the loan. Haines et al. (1999) found, based on their research of bank files of borrowers, that women were not perceived differently than male borrowers by loan officers. They also found that female entrepreneurs were offered the same terms as male entrepreneurs. So although there is a lot of literature suggesting that loan officers might be discriminating against female entrepreneurs, hard evidence is lacking to support this suggestion.

In the international context it is suggested that discrimination against female entrepreneurs does exist. Muravjev et al. (2009) in their international study on financial constraints and the entrepreneurs gender found that female entrepreneurs pay on average higher interest rates and face higher barriers in acquiring loans, they also found that this difference is much smaller (or even non-existing) in more financially developed countries. They explain this difference by the amount of competition between capital providers and legislation that is higher in these countries. The amount of competition between capital providers makes sure that capital providers do not longer have the luxury to make preferences in choosing their customers, as is the case in a monopoly position, since the competition will take over their market share.

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turndowns between men- en women-owned firms was declining in favor of women during the years between 1995 and 2001. This suggests that there might have been a problem for female entrepreneurs but that it is disappearing due to the fact that women become more accepted in today's society.

When the loan is granted, female entrepreneurs do pay significantly higher interest rates than men according to several authors (Coleman, 2000; Muravjev et al., 2009). On the other hand, Bellucci et al. (2010) have different findings. They state that there is less credit available for female entrepreneurs but they pay the same interest rates as male entrepreneurs. Verheul and Stigter (1999) explain the difference in price by the different type of financing that male and female entrepreneurs use. Males use more business credit and females often use a personal loan which is more expensive. This could point to banks viewing female entrepreneurs as riskier and therefore demanding a higher price. Based on the literature it can be stated that female entrepreneurs face the risk of encountering barriers when searching for finance due to their characteristics but the evidence for actual discrimination in practice is lacking.

2.3. Demand-side factors

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female-owned firms are smaller and grow less than male-female-owned firms and therefore use less capital than men-owned firms.

Female entrepreneurs often also have different reasons for starting a business than do male entrepreneurs. According to Zinger et al. (2007), male entrepreneurs start businesses for more extrinsic factors and have more economic objectives. On the other hand, female entrepreneurs more often favor reasons like personal enjoyment and self-actualization for starting-up their business and they have more non-economic (intrinsic) and social goals for their ventures. According to Fairlie & Robb (2009), female entrepreneurs more often report a source of secondary income as a reason for starting a business and male entrepreneurs more often report the source of primary income as a reason for starting a business. This different view on the venture might result in less capital for female entrepreneurs because it signals to the bank that the owner may be less committed to the venture resulting in banks being more reluctant in granting loans to female entrepreneurs. Evidence of this is provided by Coleman & Robb (2009) who found that owners that worked more hours were more likely to secure a loan.This is interesting since woman are often working less hours to balance their work with home responsibilities (Verheul & Stigter, 1999). Marlow & Patton (2005) and Verheul & Stigter (1999) argued that although female entrepreneurs take different approaches towards beginning and developing their ventures compared to males, they are assessed by the male norms of performance which are dominant in society and female entrepreneurs are underperforming by these standards. These characteristics may result in female-owned firms being more risky for banks and less willing to lend money to these firms.

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women. They also found that the negative effect is not bigger for female entrepreneurs than for male entrepreneurs. Alsos et al. (2006) did not find any difference in the perception between male and female entrepreneurs towards finance. Also Buttner and Rosen (1992) found that female entrepreneurs where not more likely to perceive gender to be an issue in loan rejections and they would not have been discouraged after an rejection. It should be noted, that the sample of this research consisted of experienced entrepreneurs who were almost always able to secure finance. If their sample had consisted of rejected applicants the results might have been different.

Another characteristic that authors put forward is that female entrepreneurs tend to search less for external capital (Coleman, 2000; Coleman & Robb, 2008; Orser et al., 2006). A reason for this is the distribution of female entrepreneurs in certain sectors as discussed before. Since these service sectors are not very capital intensive female entrepreneurs might be less inclined to search for capital (Wilson et al., 2007; Orser et al., 2006). This is also acknowledged by Coleman (2000) and Treigel and Scott (2005) who also found that female entrepreneurs applied for significantly smaller loans than men. The fact that these results also hold after controlling for differences between sectors (Carter & Rosa, 1998) shows that the preferences of female entrepreneurs might play an important role in the search for capital by female entrepreneurs. Another explanation for the lack of search for capital is suggested by Coleman (2000). Based on several studies she suggests that female entrepreneurs have different relationships with banks than their male counterparts do. Verheul and Stigter (1999) argue that female entrepreneurs often have less experience with financial management and acquiring finance due to the fact that women still face discrimination in their careers. Hereby they have trouble reaching positions where they can acquire the appropriate experience in acquiring finance. According to the research of Hill et al. (2006), female entrepreneurs have quite some aversion against banks when it comes to bank lending. They perceive banks as having no knowledge of small business lending. It should be noted that this was a case-study of only 7 cases and the generalizability of these results can be questioned.

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the fact that woman often have lower-paid, low skill jobs and they often work part-time. This results in having less personal savings (Marlow & Patton, 2005; Alsos et al., 2006). On the other hand do Björnsson & Abraha (2005) conclude that female entrepreneurs did not perceive the service quality of banks as less good than men and they even found that a group of female entrepreneurs that were active in the retail sector perceived quality of the service more positive than men. Verheul and Stigter (1999) suggest that female entrepreneurs may be more honest and realistic towards the bank which in turn maybe more trusting towards women resulting in more loans supplied by banks.

Arenius & Autio (2005) found that although female and male entrepreneurs are very similar in financing their businesses, female entrepreneurs are more likely to obtain for finance of relatives. The heavy use of personal savings and the loans of family and friends is frequently noted in the literature (Carter & Rosa, 1998; Coleman, 2000; Robb & Wolken, 2000). The use of personal finance might lead to less applications for capital signaling that there might barriers for finance while these might not be existing. It also might be the explanation for why female entrepreneurs are less likely to apply for external finance.

In table 1 an overview of the articles that were used in the literature review is presented. I categorized them according to the type of discrimination for which evidence was found or which type is suggested as an explanation for the findings in the article. Some articles are mentioned twice because here evidence was found or suggestions were made in favor of different types of discrimination. The number between brackets behind every reference refers to the quality of the journal where the article was published. The quality of the journal was verified through the Academic Journal Quality guide of 2010 (ABS, 2010). The meaning of the scores is as follows: 1 stands for low quality and 4 for high quality. See for full explanation of the scores appendix II. As can be seen in table 1, the findings on discrimination differ significantly across the different articles. This shows that research in this field is still necessary. I also describe the key argument that the author(s) make(s) in the article. The letter between brackets behind the key argument refers to the kind of argument. The kinds and their meaning for this research will be explained hereafter.

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women are presumed to have. This argument is mainly in favor of the type 1, Becker discrimination. The stereotypes determine how loan officers view their clients with respect to their attributes for example. If the stereotype that loan officers have is negative as is suggested by Marlow & Patton (2005) it can have negative consequences for female entrepreneurs when they are seeking finance. This kind of argument is very relevant for the research because it directly affects the outcome of the loan application process. This argument will be checked in the interviews by asking about the personality that the entrepreneur has to possess according to the advisors.

(B) These kind of arguments have to do with the specific characteristics that female entrepreneurs and their ventures possess in general. This kind of argument is mainly in favor of type 2, statistical discrimination. Often mentioned characteristics in the literature are smallness and newness of their venture, type and sector of their business and lack of experience (for a complete overview of the characteristics see table 2). These arguments are also very relevant for the research. Loan officers might use these characteristics as criteria when they assess loan application. This argument will be checked by determining in the interviews which sectors have relatively much denials when applying for finance.

(C) These kind of arguments refer to the preferences and ambitions that female entrepreneurs might have like the desire to balance work and family, motivations to start the business and the use of external capital (for a complete overview of the preferences see table 2). This kind of argument is mainly in favor of the type 3 demand side factors. This kind of argument also refers to perceptions that female entrepreneurs might have like the fear of being turned down for an application and the perception of financial barriers. Another aspect of these arguments is the higher risk aversion of women and lower self confidence. These arguments are not relevant for the investigation since they do not really affect the process of application. They do affect the decision of the female entrepreneur to search for (smaller amounts of) finance. But since this is not part of my research I will not take this any further.

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2.4. The assessment of applications

Loan decisions are based on both objective and subjective information or judgments. The assessments of applications are often summarized as the 5 C’s: character, capacity, capital, collateral and conditions. (Haron & Shanmugam, 1994; Blake, 2006; Wilson et al, 2007).

Character

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Table 1 Overview of articles used for the literature categorized by type of discrimination they suggest or where they find evidence for:

Type 1 Becker discrimination Type 2 Statistical discrimination Type 3 Demand side factors No discrimination

Buttner & Rosen, 1988 (4) No real evidence

of discrimination but attributes of successful entrepreneurs such as leadership, autonomy, risk taking, readiness for change, endurance, lack of emotionalism and low need for support are more commonly ascribed to men than to women which may lead to stereotyping among loan officers. (A)

Marlow & Patton, 2005 (4)Woman face

negative stereotypes which they cannot escape and which also have a negative influence on their activities resulting in barriers when they search finance. (A)

Alsos et al. 2006 (4)Woman raise less capital,

even after controlling for differences in perceptions and behavior, resulting in less growth of their businesses. (D)

Carter et al. 2007 (4) Although criteria that

are used by bank loan officers only differ slightly with the sex of the applicant, the differences may point to gendered perceptions of men and women. (A)

Riding & Swift, 1990 (4) Female

entrepreneurs receive less favorable credit terms even after controlling for the different characteristics they have.(D)

Bellucci et al., 2010 (3) Discrimination

independent of the information available about borrower and resulting in tighter credit availability. (D)

Orser et al., 2006 (4) Systematic differences like

sector, smallness and less growth explain why women-owned firms search less for finance. After controlling for these factors no discrimination can be found. (B)

Riding & Swift, 1990 (4) Systematic factors are

an explanation for the less favorable financing conditions that have been found. After controlling for these, only higher collateral requirements for female entrepreneurs were found to be statistically significant. (B)

Fay & Williams, 1993 (4) Although real

discrimination is not really found there was difference in the assessment of male and female entrepreneurs in that education was considered more important for female entrepreneurs. (B)

Coleman, 2000 (3) Discrimination on size and

type of business (service) results in higher interest rates and collateral requirements. (B)

Fairlie & Robb, 2009 (3)Female-owned firms

have different characteristics such as less performance and less prior work experience. (B)

Coleman & Robb, 2009 (3) Females use less

start-up capital. Reasons proposed are the newness of female-owned firms leading to higher risks. (B)

Verheul & Thurik, 2001 (3) Female

entrepreneurs have different profile than male entrepreneurs. They are more likely to work part-time, in the service sector and they have

Coleman & Robb, 2009 (3) Females use less

start-up capital. Reasons proposed are higher risk-aversion, desire for smaller firms and maintaining control over the firm. (C)

Roper & Scott, 2009 (3) Females are more

likely to perceive financial barriers resulting in a negative effect on start-up rates (C).

Verheul & Thurik, 2001 (3) There is a direct

gender effect which shows itself in that females apply for smaller amounts of capital due to their lack of confidence in their own entrepreneurial capabilities. Also they might have different ambitions than male

entrepreneurs. (C)

Treichel & Scott, 2005 (2) Female

entrepreneurs are significantly less likely to apply for a loan because they may believe that they face discrimination. Also they might want to maintain control over their

businesses. (number of turn-downs does not differ between female and male entrepreneurs)

(C)

Constantinides et al., 2006 (2) There are

gender effects with regard to choices, preferences and needs for business financing.

(C)

Zinger et al., 2007 (1) Female entrepreneurs

prefer to work part-time and have perceptions of poor opportunities. This constrains them in their search for finance. (C)

Buttner & Rosen, 1989 (4)Financial data is

more important than gender. Females are rated even better based on an interview. (B)

Sexton & Bowman-Upton, 1990 (4) Male

and female entrepreneurs possess similar traits. The small difference is not enough to lead to a gendered stereotype. (A)

Wilson et al., 2007 (4) No discrimination, but

authors state that bank loan officers all have individual constructs (gut instinct and intuition) which they use to assess applications. (A)

Buttner & Rosen, 1992 (3) Both male and

female entrepreneurs state have same responses towards rejection of their loan application. They both state that gender bias is highly unlikely as an explanation for their rejection. (C)

Haines et al., 1999 (2) No differences between

male and female entrepreneurs with regard to terms of financing, non-financial attributes and financial characteristics. (B)

Arenius & Autio, 2006 (2) No differences

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Muravjev et al., 2009 (3) Discrimination

results in 5% lower probability of receiving a loan and higher interest rates. Discrimination declines with the financial development of the country. (D)

less managerial experience. (B)

Carter & Rosa, 1998 (3) Female and male

entrepreneurs are refused on different reasons although the number of refusals are the same.(D)

Constantinides et al., 2006 (2) There are

gender effects with regard to financing in terms of the firms attributes and the entrepreneurs characteristics. (B)

Blake, 2006 (2) The rules for business lending

that lead to a (natural) gender bias. (capital requirements for female-dominated industries; experience requirements that emphasize skills of male-dominated industries) (B)

Treichel & Scott, 2005 (2) Female

entrepreneurs receive much smaller loans because of the characteristics of their businesses. (B)

Zinger et al., 2007 (1) Female entrepreneurs

are concentrated in service-sector and have lower incomes. This constrains them in their search for finance. (B)

Verheul & Stigter, 1999 (?)Female

entrepreneurs have a different profile. They start in the service sector, have smaller ventures, have less experience and often work part-time resulting in less capital at start-up. (B)

Robb & Wolken, 2002 (?) Female owned firms

are smaller, younger and concentrated in retail and service sectors. They are also considered to be greater credit risks. (B)

Verheul & Stigter, 1999 (?)Female

entrepreneurs are less self-confident, have different ambitions and are more risk-averse than males entrepreneurs. (C)

Robb & Wolken, 2002 (?) More women than

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Table 2 Overview of the factors named in the literature and times mentioned or proved.

Statistical discrimination Demand-side factors

Characteristics of female entrepreneurs and female-owned ventures:

Nr. Preferences of female

entrepreneurs:

Nr.

Concentration in certain sectors 12 Use of external capital 6

Prior experience 9 Hours working 4

Size of the venture 9 Motivations for starting business 4

Age of the firm 6 Risk aversion 4

Performance 5 Size of the loan 2

Amount of start-up capital 5 Domestic situation 2

Amount of own capital 4 Perception of barriers 1

Education 4

Relationship with capital provider 3

Capacity

By capacity banks look at the earning power of a businesses. (Blake, 2006) Many banks base the assessment of this aspect at least partly on the prior labor experience of the entrepreneur (Blake, 2006). This can have negative consequences for female entrepreneurs since they are typically working in certain sectors. This predisposes them also to start businesses in these sectors when this is a aspect where banks look at. Females may also lack the necessary management skills for starting a business since they are often subordinated in the labor market and therefore do not get the chance to acquire these skills.

Collateral and Capital

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Conditions

The conditions refer to the market situation and sector in which the firm is starting. The attractiveness of the market is obviously very important here. Starting firms in crowded and saturated sectors will less attractive for banks to finance since there is a higher probability of default. Still, according to Blake (2006) are banks willing to judge every case individually instead of assessing on the basis of the whole industry. On the other hand did she also find that loans officers in some cases do see gender as an issue when it comes to the sectors where the firm is starting. Loan officers saw certain sectors as more fit for females such as beauty shops and other services, where other sectors where more fit for males such as construction and auto repair shops. (Blake, 2006). Although this can have negative consequences for female entrepreneurs starting in “male” sectors it can also be an issue for male entrepreneurs who are trying to start in “female” sectors.

As can be concluded from the literature there is no evidence of discrimination against female entrepreneurs in the loan process but due to the highly subjective aspects of this process female entrepreneurs might face the risk of being treated different than their male counterparts.

2.5. Methodological problems in the literature

In the literature review it becomes clear that although it is often suggested that female entrepreneurs are treated differently, evidence to back up this statement is often lacking or ambiguous. For example, according to Constantinidis, Cornet & Asandei (2006) only 43% of the respondents in their sample of 258 female entrepreneurs and self-employed people, indicated that they faced barriers in acquiring start-up finance. The figure of 43% is quite low considering that the access to finance is named males and females as a problem in business start-up (Riding & Swift, 1990). Also saw 86% their application for finance approved which is very high considering that the average rate of denial in the Netherlands lies around 50% (EIM, 2011).

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samples e.g. Hill et al., 2006 (Haines et al., 1999) and low response rates (Treigel & Scott, 2005). Also there is the possible bias of self-selection. This consists of female entrepreneurs that have not applied for a loan out of fear for denial. This may skew the results because the actual number of rejection on applications would be much higher if all these entrepreneurs would have applied for finance (Muravjev et al., 2009; Treigel & Scott, 2005). Most of these problems are associated with large and smaller scale surveys among female entrepreneurs.

3. Methodology

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For this literature review I searched electronically in Business Source Premier and Econlit on the following key words: gender, discrimination, finance, access to finance, bank loans, female entrepreneurs, woman-owned businesses, characteristics, bank loan officers or a combination of these key-words. I also "went backward" as is suggested by Webster & Watson (2002) by looking at citations of the articles that were found through the search on the key words. I did this by first ranking the articles according to the journal in which they were published and then starting to look at the citations of the articles that were published in top journals as identified by the ABS-list.

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4. Results

The formal structure or policies consists of all the documents which refer to the process and provide a framework in which the loan officers has to assess the application. They also provide the rules and guidelines that are mandatory for the loan officers. Still, it is possible that the loan officers might have a different view than the one the bank tries to carry out. This difference might come from the different constructs of character, subjective judgments about entrepreneurs and the individual decision-making of the loan officers. This might result in the outcome of the assessment reflecting the view of the loan officer rather than the banks policies (Carter et al., 2007). In this research there is distinguished between the policies and views of the loan officers by first determining all the formal policies that the Rabobank has in place. An overview of these policies is provided later in this chapter. The use of these policies is checked by interviewing the loan officers and their managers. Any differences between formal policy and view of the loan officers may result in discrimination depending on what the view of the loan officer is. This chapter will continue by first giving a short description of the customers of the Rabobank so that it is clear what kind of applications are dealt with. Next, an overview is given of what the policies of the Rabobank and Rabobank SMG say about the financing process. This chapter concludes with an overview of the opinions of the loan officers and their managers.

4.1. The customers

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clear that female-owned firms are on average smaller than male-owned firms. This means that male-owned firms will more often fall in the categories of Business Relations and Large businesses than female-owned firms. These categories get much more customized service and female entrepreneurs may therefore feel they are treated differently while they just do not fit in the criteria for these categories.

Within Business Advice there are three different types of customers. These are entrepreneurs, ZZP’ers and associations & foundations. Entrepreneurs are people who want to start their own venture and typically want to grow it. ZZP’ers or self-employed persons are people who want to maintain their current standard of living but typically do not want to grow. The last group are often non-profit organizations and help the Rabobank to sustain their image of local involvement in the community although they are often not profitable clients. These clients are not a part of this research. The Rabobank has around 40% market share of the small business market and is market leader in this segment. On the other hand is, according to the Rabobank, the competition growing so the Rabobank should look critically to their processes they apply in the market to maintain their position in the market.

4.2. Starters

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starters in the work area of Rabobank SMG are in the sector of business services. Other popular sectors are retail, construction and catering and recreation.

4.3. Overview of the policies of the Rabobank Stad en Midden Groningen concerning

business finance.

The Rabobank SMG has, like many other organizations, policies in place which regulate the way they do business. In their policy regarding the financing of businesses they state as their goal: “To give interpretation to local entrepreneurship in a responsible way.” Key in the whole process is “being a good banker”. Although this is open for various interpretations, Rabobank SMG has the following explanation: We act at the intake and management of

customers as a decent, upright and professional bank, that follows the legal and regulatory framework of the government and the supervising authorities, and the general rules that have

been established by Rabobank Nederland. This typically presents the conformation to social

and legal rules and norms which every organization has to deal with. This does neither prove nor disprove that female clients of the Rabobank SMG are treated differently than their male counterparts.

The policy has the following starting points:

- Offering a service that fits our customer and that is focused on his and our continuity.

- In order to offer continuity, we follow a weighed risk and acceptance policy based on integrity, respect, expertise and our duty with regard to the welfare of our customer.

- Offering market-oriented and transparent rates and conditions.

- Crucial is the degree of professionalism of the people involved in the financing process. Professionalism shows itself in expertise, an risk-conscious attitude and a close cooperation between all the people involved in the process. It is also important that quality of the process and organizational structure and execution are correct.

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4.3.1. Acceptance of (new) customers and their applications

The policies state about the acceptance of new customers that internal rules, like policies and guidelines, and external rules, such as laws, determine if an application is accepted or not. The assessment of the creditworthiness of customers is primarily based on trust, sufficient entrepreneurship, the perspective of the venture, the presence of sufficient cash flows and a positive return on the customer. The first three criteria are rather subjective and mainly concern the entrepreneur (trust and sufficient entrepreneurship) and the venture (perspective). The subjectivity is especially important since these criteria are not further specified in the policy and therefore left open for the interpretation of the advisor. The A-type argument might play a role here. Since these criteria are subjective, the view or stereotype that loan officers has or uses with regard to the client might very well influence the outcome of the application for finance. The last two criteria are more objective criteria that can be substantiated with some kind of figures. These figures may for example consist of forecasts of cash flows and calculations by the bank on revenues of the customer. Here discrimination will be more unlikely since the figures speak for itself. Statistical discrimination might be an issue here since, according to the literature, female-owned businesses are performing worse than male-owned businesses. If this is really the case than female entrepreneurs are at a disadvantage when they apply for finance at the Rabobank although this may be inherent to the sectors they are situated in.

According to the policies the decision to provide services to a customer can only be taken when there is sufficient information available. This means that customers have to provide enough information before their applications are even considered. With this rule the bank aims to achieve that denial or acceptance will be a well-informed decision. Of course, the fact that the customer has to supply the bank with all kinds of information does not mean necessarily that all the information will be considered during the assessment. This will be discussed further later on.

The bank policies exclude (potential) customers from financing when:

- Their charisma can have a negative influence on the image of the bank or the Rabobank Group.

- Their morality is questionable.

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- The customer has a criminal history and/or relation with criminal activities.

These rules are not something odd or directed at certain groups within society or gender. The exclusion of these customers has nothing to do with discrimination, rather they are the result of “being a good banker.” The financing of BA customers is always done by an advisor, because of the complexity of these products and the advice that the customer needs. When advisors assess a application for finance, they should first determine the goal and the need for the application. After determining the goal the advisors assess the application on the bases of four pillars according to documentation of the Rabobank. These four pillars are Entrepreneur & Venture, Security, Margin/Cash flow and Capital. In the Entrepreneur & Venture an overview of the entrepreneur is given regarding his vision and strategy but also his experience en education. In the Security-pillar advisors check for anything that can serve as collateral and how this will develop in the coming years. In the pillar Margin/Cash flow the advisor checks the viability of the company and if it has an existence based on the projected cash flows for the coming years. In the pillar Capital the solvability of the venture is assessed and also the development of it. For an overview of the pillars and the criteria that are used in each pillar according to the policies, see table 3. After the pillars have been assessed, the advisor looks at the liquidity position of the customer like debtors, creditors and working capital.

Table 3 Overview of pillars and the aspects on which advisors assess.

Entrepreneur Security Margin/Cash flow Capital

- Vision + strategy (*) - Relevant experience (*) - Relevant education + (industry) knowledge - Networking/ Cooperation

- Other strengths and weaknesses

- Age and family situation - Primary - Secondary - Blanco/surplus - Development - Involvement - Other details - Past - Future (goals) - Development and fluctuations - Sensitivity - Industry comparison - Other details - Solvability - (B) AV - Composition - Development - Industry - Other details Venture - Legal structure - business activities - Internal organization - Suppliers/customers - Industry/market - machinery / inventory / building - Legislation

- Other strengths and weaknesses

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4.3.2. Sector policy

The Rabobank does not apply policy with regard to sectors. This means that no sectors are excluded beforehand from the provision of services according to the policy of the Rabobank. On the other hand they do strive for an equal distribution of sectors within their portfolio to spread the risks the bank faces according to the policies. Here a disadvantage for certain entrepreneurs may present itself. From the literature it becomes clear that female entrepreneurs are known to “crowd” in certain sectors. If the bank has already relatively many customers in these sectors other female entrepreneurs in these sectors might be disadvantaged when they are searching for finance. On the other hand it remains a question whether the bank will deny requests on the basis of their own portfolio or on the crowding in the market whereby there are unfavorable conditions in the market. Here the statistical discrimination argument might play a role where female entrepreneurs are disadvantaged due to their characteristics. Still, the policy states that every customer needs to be judged on his or her own performance and that no application is denied beforehand on the basis of the sector where the venture is situated. The performance of the entrepreneur is judged relative to the market. This might be an advantage for female entrepreneurs. If they perform worse than their male colleagues due to the sectors they typically choose to start in, the difference can decline here since they are judged as equals. To judge the performance of entrepreneurs relatively to sector they are in, the Rabobank continuously gathers information about these sectors. This current information is available to all the loan officers. Rabobank SMG does make one exception with regard to its sector policy. They are reluctant towards financing new customers in the maritime sector due to the recent developments in this sector and the already high concentration of Rabobank SMG in this sector. Since this is not a typical female sector it is highly unlikely that gender discrimination occurs as a result of this exception.

4.3.3. Determination of rates

Rates that are charged for the provision of finance are based on advices that come from Rabobank NL. The local Rabobank can deviate upward and downward from these rates. When the it comes to differentiation on rates the following considerations can play a role:

- Local competitive environment. - Financial position of the bank.

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- Image or charisma of the relationship.

- Economic interest as ambassador or advocate for the Rabobank.

All these considerations do not give rise to the thought that there might be an explicit form of gender discrimination. An interesting point is the financial position of the bank since this could point to the fact that due to the last economic crisis the banks will be more reluctant to take higher risks. In the literature it is made clear that female-owned firms are often smaller, newer and therefore riskier. This in combination with the reluctance of the bank could result in more denials for female-owned firms. What may also play a role here are the stricter rules that the banks have meet in the Basel II accord. Still the Rabobank explicitly states that they will not introduce a sector policy and exclude high risk customers. They do state that riskier customers have to pay higher rates and higher demands can be asked of entrepreneurs in risky sectors. They also indicate that entrepreneurs can influence their own risk rating through the following actions:

- Maintain a good administration and manage the venture well.

- Make sure there is a well-founded solvability, especially in sectors with higher risk. - Make sure your capital can be well-founded by the bank.

- Make high-quality forecasts. - A healthy cash-flow.

If customers manage to improve their risk-rating they will see their application approved quicker, under more favorable terms and with better credit rates. This also depends on the key criteria and factors named in table 3. The scores on these factors determine the risk-rating of the customer. Although deviation of the advised rates can take place, the bank follows the principle of equal rates under equal circumstances at the assessment of financing and the risk-classification. In first instance the advised rates by Rabobank NL are followed. Differentiation can only take place within the authority of the assessor (this varies with the function the assessor has) and with sufficient argumentation.

4.4. Views of the loan officers

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among the advisors of the two banks were not greater than the differences among the advisors in the same bank and these were already small. This can be seen from the following example in table 4. Larger differences where on aspects like the amounts of the loan where the advisors still have authority as can be seen in table 5. This was the question with the highest differentiation in the answers. A reason for this is the fact that this is really something someone just has to know at that moment and in normal practice do they never encounter these high amounts. The other questions were more about the behavior of the advisors. Here the differences between the answers were smaller, making the answers quite valid. The fact that the answers were very consistent and no new factors were discovered was also the reason why there were no more than six advisors and two managers were interviewed. The small differentiation in advisors’ answers of both banks was the reason why advisors of only two Rabobanks were interviewed. The structure of this paragraph is the same as the previous paragraph. First the familiarity of the advisors with all the policies within the Rabobank is discussed.

Table 4 Interview question with low differentiation between answers.

Interviewee When you look at the pillar entrepreneur, where do focus on? What is important?

1 You really look at the track record, what has someone done and what is he planning to do.

Does he know himself, his strengths and weaknesses?

2 The background of the entrepreneur is what I think is important. What has someone done in

the past. What is his education and experience? What makes him stand out from the rest. He really has to know his strengths and weaknesses. Also the domestic situation is

important.

3 If he has any experience and if I see him or her do it. It’s a bit of a feeling you have. That

feeling is based on the conversation. Do you see that person do it and does he understand what he wants to do. This can point to the knowledge or experience one has.

4 I really look at experience, education and age. I also find the domestic situation important.

In the end also the persuasiveness and someone has to have a grant-factor.

5 I try to form a judgment about the capacities of the entrepreneur. What is also important is

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6 What is the past of the entrepreneur, what is his age and what are his reasons to start a business. You look at his personal characteristics. This is mainly based on a personal conversation.

Manager 1 You look into the eyes of someone and have the conversation with someone and you try to

figure out what kind of skills has someone? The level of education is also very important but also the networks in which someone is participating and other activities where he or she was involved. You really look at all the weak and the strong points someone has.

Manager 2 It is a feeling that you have when you shake the entrepreneurs hand for the first time. What

is his story and is he willing to sacrifice for the venture? How has the entrepreneur arranged everything?

Table 5 Interview question with high differentiation between answers.

Interviewee Until which amounts are you (advisor) allowed to accept the application yourself?

1 It depends on the risk, I believe it can be up to 700.000 or 800.000 euro. There is some kind

of matrix for and it is quite new. Nowadays we conform ourselves to the authorities as supplied by Rabobank NL. Then there are also boundaries between BA and Business Relations. But it is not clear what is more important: the boundary or the authority.

2 This depends on the risk-rating of the customer. When this is very low than we have the

authority till 600.000 euro. We also have another boundary and that is I think around 250.000 euro when the customer goes to Business Relations but sometimes we are allowed to do it ourselves.

3 I always take a look at this matrix. Up to 50.000 euro it does not matter what the risk is and

we are allowed to accept the application. When the risk-class is EL11 than we are allowed to accept up to 200.000, when it is EL-8 than up to 600.000 and when the risk-class is below EL-3 than we have the authority up to 1 million. But is practice we never do this much because than the customer already goes to Business Relations. We do starters up to 150.000 and existing customers up to 250.000 euro.

4 150.000 euro for starters and 250.000 euro for existing customers. Sometimes it is a little

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5 On paper it is up to 1 million euro but that never happens in practice. Our practical

boundary lies around 400.000 till 500.000 euro. According our authorities we can do up to 1 million but it depends on the risk rating. When there is a very low risk than we have the authority up to 1 million and until 50.000 we are allowed to accept anything regardless of the risk, in theory off course. When you look at the authorities than up to 200.000 euro it is quite relaxed, after this there often others who also have to look at the application.

6 It depends on certain factors. It is possible that I have the authority to accept an

application for 300.000 euro. On the other hand there can be an application for 100.000 euro but with high risks where I do not have the authority. The level of authority is determined by the system where we enter the application.

Manager 1 This has just changed. In the past the advisors had the authority to accepts amounts up to 50.000 euro. Now this is according the rules of Rabobank NL and I think that is about 800.000 euro. Bit within BA we only do up to 250.000 euro. They have the authority to go higher but than there is some more consultation.

Manager 2 We work according to the rules of Rabobank NL. I think the amounts lies around 100.000 till 200.000 euro. I believe it will be raised to 500.000 euro. But this happens never in real practice. It also depends on the complexity of the application.

4.4.1. Familiarity with policies

All the advisors indicate they are quite familiar with the policies of the Rabobank. Because of the great number of policies it is almost impossible to learn them by heart and the advisors indicate that most of the time they know the highlights of these policies. The policies also tend to change quite often and this makes it necessary to check these policies regularly. The advisors always have instant access to the latest version of the policy through the company's intranet. They all indicate they use this quite regularly when they encounter something specific that is unfamiliar to them or something they have their doubts about but they do not use them at every application. As one advisor stated it: “I know the policies well. I have the

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The managers also indicate that their advisors are quite familiar with the policies. They indicate that these policies are discussed in workshops and meetings. There are also checks to see if the advisors follow the policies correctly. These checks can be done by the advisors themselves on each other's work through so-called first line checks but also by other departments within the bank. According to the managers did these checks not reveal any large flaws, the mistakes that were found had to do with issues regarding the process not the policies. One of the managers indicated: “Some months ago, we have had workshops where

the financing policy was discussed with them. I have the impression that the policy is quite well known among the advisors…We do first line checks, process checks and audits. They indicate that the advisors still make mistakes but it is more on the level of the process than on

the level of the policy.” According to the managers are the advisors allowed to deviate from

the policy but they cannot do this by themselves. If they want to deviate a committee has to take a look at it. This happens rarely within the department of BA. What is very interesting to see is that not one of the advisors even mentioned the checks and workshops although both managers indicated that they do occur. The advisors all indicated that they always checked any changes or new policies themselves by checking the intranet. Still, one of the managers found that the advisors should take more initiative in checking the policies. She stated: “When

I started here as manager BA after the merger, I found it shocking that some people did not know or use the policies at all. I thought they could take some more responsibility for this with each other. You are an advisor, you are doing finance so you should read first the financing policy, you should start with that. It is your Bible so to speak…I sometimes think that the advisors should take a different attitude towards this.” This could indicate that advisors in the past where less strict in using the policies of the Rabobank but this problem is less apparent nowadays. Since it is hard to determine what the policies were in the past it is also hard to determine if this had any negative consequences for female applicants.

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critically and also stricter conditions can be demanded. As one manager made clear: “ We

have no sector policy. Every application from every sector should be judged on its own merits. In the catering sector there are also top-entrepreneurs…We made extra demands in the previous policy with regard to this sector but not in the current policy. Still, the advisors should bear in mind that it is the catering sector.” This is also in line with the policy of Rabobank Nederland which both groups say they conform to. So there is some disagreement among the advisors and even the managers on what the right policy with regard to sector is. A reason for this can be the fact that this policy has changed recently. So even though the advisors and even the managers state that they keep up with the changes in the policies there is some disagreement among them. Still, I do not find this significant enough to prove that the advisors do not really follow the policy or are willingly defying it. The checks prove that the advisors are following the policies for the largest part correctly. Also the answers of the advisors on the question if the use the policies at the assessment of every application indicate they use the policy regularly:

“You check the policy when you encounter certain issues like the exact values of securities or something what you do not see every day. Since the policy changes quite often you also have to check the policies quite often.”

“If I am for example working on securities, I often check if I need a valuation and if I have entered the securities into the system correctly. So you try to test each part of the application on the policies.”

“Everything that doesn’t come up regularly needs to be tested on the policy otherwise you are going to make mistakes.”

4.4.2. Acceptance of (new) customers and their applications

The role of gender in the assessment of applications for finance.

Master Thesis