Contextual Factors and Challenges Affecting SMEs’ Access to Bank Finance and Performance: An Empirical Investigation into the Case of Saudi Arabia

Abstract

<p>Small and medium enterprises (SMEs) play a vital role in the modern economic system in providing alternative employment opportunities to the unemployed and efficiently and cost-effectively contributing to countries' economies. Over the years, SMEs have been acknowledged as substantial contributors to the economic growth of countries around the globe, providing a foundational platform for innovation in various business sectors. In the context of Saudi Arabia, SMEs comprise a more significant proportion of business enterprises operating in Saudi Arabia than large corporations. Nonetheless, SMEs face numerous challenges that limit their performance and growth. The most significant challenge remains financing. The availability of capital is a crucial element influencing the success or failure of any enterprise, whether large or small. SMEs being small and vulnerable to internal and external shocks pose a higher risk to external lenders. Hence, their access to timely and sufficient finance is a significant obstacle for their long-term sustainability and growth, particularly in developing countries such as Saudi Arabia. SMEs require access to external funding to have enough capital and financial resources to sustain their operations, fuel their growth and accomplish a higher performance. Despite the high significance of this particular business sector for the country's economic growth and its crucial relevance to the success of the country's Vision 2030, little empirical research, if any, particularly at the detailed exploratory level, has been devoted to exploring issues that are crucial to the sector's survival and sustainability. This current research project is a step in this direction, examining the factors that affect SMEs' accessibility to external bank financing and the impact of the same on their sustainability and performance. The research also investigates the challenges confronting SMEs s in Saudi Arabia and the lending criteria and requirements for small businesses imposed by banks and other financial institutions. The study also analyses the mediating influence of SME governance on the negative or positive appraisal of eligibility for funding for SMEs by government agencies in Saudi Arabia. The study identified six broad factors that affect SME's accessibility to bank financing—entrepreneurship factors, cultural factors, firm characteristics, banks' evaluation of SMEs eligibility for funding, SME governance and characteristics of financial information.</p> <p>The study's primary data utilises a concomitant triangulation design combining qualitative and quantitative techniques. This technique aims to gather extensive feasible data while simultaneously providing support to both qualitative and quantitative data. These data were collected using a survey conducted via questionnaires from 688 SMEs in Saudi Arabia and interviews with 20 business owners/managers of SMEs, 12 credit officers of banks and five members of government organisations in Saudi Arabia. Under the mixed methods approach, both quantitative and qualitative data were crucial for the researcher to explore and comprehensively understand and explore the research problem, given the diversity of the sample, which consisted mainly of SME managers/owners, government agencies and bank credit managers, as well as the scope and focus of the topic under investigation. Resorting to the qualitative method helped the researcher interact closely with the study participants and explore and understand the statistically quantifiable relationships among the study variables. Conversely, the quantitative approach helped measure the following eight sample variables in the light of the study objectives: firm characteristics, financial information characteristics, cultural factors, entrepreneurship factors, banks' evaluation of SMEs, obtaining finance, SME governance and firm performance.</p> <p>This current study results revealed that access to financing continues to be the major challenge facing small- and medium-sized businesses in Saudi Arabia. The results also show that most SMEs' owners/managers failed to receive funding from Saudi banks for several reasons, including lack of adequate collateral to secure the banks' position, poor financial performance, unfeasible business strategies, insufficient information and business ventures that did not qualify for financing from financial institutions. The study outcomes also revealed that the banks relied heavily on governmental help and support to fund SMEs. Consequently, specialised government agencies were more compatible with SMEs' peculiar operational and structural requirements than banks. The study revealed that government institutions need more regulations to develop the SME sector. Further, since SMEs rely primarily on the acquisition of capital from limited internal sources of funding rather than external sources, factors affecting their funding are crucial to their efficiency and performance. The study revealed that cultural factors affected firm characteristics and entrepreneurship factors on characteristics of SMEs' financial information. Moreover, the cultural factor, the entrepreneurship factor and the characteristics of SMEs' financial information directly affected banks' evaluation of SMEs' eligibility for funding. The firm characteristics, the characteristic of SMEs' financial information, and banks' evaluation of SMEs had substantial direct effect on SMEs financing, the study results further revealed. SMEs' performance had a significant direct affect from the level and extent of their access to banks' financing. In addition, the research results also displayed a significant level of positive mediating effect on the banks' evaluation of SMEs' eligibility for and access to finance by the SME governance, which serve as intermediaries in financing negotiations between two stakeholders.</p> <p>This current research is timely, relevant and first of its kind in the context of Saudi Arabia because it aims to address pertinent issues in connection to the sector's financial challenges and limitations to access bank finance while the country is pursuing its Vision 2030, under which diversification of its economy with a more market-oriented focus and elimination of its overdependence on the oil and gas sector are the primary goals the government has set. The study will assist Saudi Arabia to better understand and efficiently tackle the current financing problems confronting SMEs. The study provides crucial insights into the characteristic of SMEs in Saudi Arabia and the internal and external factors that play a role in limiting their access to bank finances, highlighting the critical role of governments and financial institutions in providing easier and achievable financial access to SMEs. The conceptual framework developed as part of the research endeavour shows how governments and financial institutions can implement workable solutions to improve SMEs' access to financial help. The research findings indicate the existence of a significant 'SME financial gap' in the context of Saudi Arabia, despite the government's efforts to make funding accessible to the country's SME industry. The SME funding model the study puts forth will significantly improve SMEs' access to bank finance by streamlining financial processes and services in lending institutions to better suit the peculiar needs of the country's SMEs.</p> <p>The above findings concluded the research project with implications for academics, practitioners and policymakers in Saudi Arabia. Further, it provides recommendations for a dedicated support package that would ensure the growth and improvement of SMEs in Saudi Arabia and promote their access to bank finance through the facilitation by all stakeholders of a trustful relationship between SMEs and financial institutions. Finally, suggestions for future empirical research in closely related areas are made to the benefit the sector, particularly as the country approaches the culmination of its Vision 2030 and beyond.</p>