INCORPORATING BEHAVIOURAL FINANCE INTO ENTREPRENEURSHIP EDUCATION A THEORETICAL REFLECTION
Abstract
It is generally agreed that, particularly in developing countries such as Ghana, lack of access to finance is one of the most binding constraints to Micro, Small and Medium Enterprise (MSME) development. Available literature focuses mostly on supply-side issues that are seen to need attention. However, little is understood about how the financial behaviour of MSME operators affects access to finance, and what the appropriate responses may need to be in order to foster sustainable linkages between MSMEs and financial institutions.
This is an important conversation for a country such as Ghana because of two main reasons: (1) The tremendous change that is currently taking place in the local financial sector; and (2) the growing recognition of the role that the education system can play in positively influencing what is perceived by some to be poor money-management behaviour of Ghanaian MSME operators.
This is a theoretical paper that draws from the emerging field of behavioural finance to identify important conceptual and theoretical building blocks that it uses to point towards a theoretical framework that may subsequently be tested empirically in order to generate further knowledge and inform the direction of entrepreneurship education.
The study begins a conversation intended to ensure that entrepreneurship education can appropriately respond to questions that continue to be raised with regard to how the financial behaviour of enterprise operators may be affecting financial access and how players such as policy makers, financial institutions and business advisory service providers could be better prepared to engage with issues associated with this matter.
Keywords: Behavioural Finance, Access to Finance, MSMEs, Entrepreneurship
1. Introduction
Entrepreneurship development among Micro, Small and Medium Enterprises (MSMEs) is widely seen as important to inclusive economic growth and poverty alleviation (Pennisi, 2012). This is because MSMEs are seen to create spill-over effects that are felt in realms such as social and political development (OECD, 2004). Many developing countries have therefore put together formal strategies that seek to tap into the potential that entrepreneurship development of the MSME sector could hold.
In the case of Ghana, Oppong, Owiredu and Churchil (2014) point to the prominence that MSMEs continue to receive and how current intervention strategies seek to capture the direction set by the economic reforms dating back to 1983. Often emphasised is the need to increase the contribution of MSMEs to employment and overall economic growth. However, despite many years of public and private investment, Ghanaian MSMEs, just like in many other developing countries continue to present poor showing as evidenced by a weak industrial base that exhibits low levels of innovation, productivity, output and capacity utilization, and that continues to fail to adequately tap into an ever growing numbers of skilled individuals not able to find meaningful career opportunities in the large corporates or public sector (Osei, et.al., 2016; Margolis, 2014; Xavier et al,. 2013).
Several key constraints to entrepreneurship development among MSME operators have been identified. Access to finance is one of the most frequently mentioned, with a number of researchers citing work done by Dinh et. al. (2011) around this matter. Access to finance refers to the possibility that individuals or enterprises can access financial services that include credit, deposit, payment, insurance, and other financial risk management services (Helms, 2006). Various studies have advanced the view that a positive relationship exists between access to finance and MSME development and, in turn, overall economic development (e.g. Owusu & Odhiambo, 2015; Long & Xiaobo, 2011).
Ghana has in the recent past made major strides towards reforming the financial sector in order to, among other things, make finance more accessible to entrepreneurs operating in the MSME sector. These reforms have included the liberalization of Ghana's financial system, including the relaxation of interest rate controls, credit ceiling, partial privatization of the government's own banks, restructuring of public sector banks, capital markets developments, and deregulation of the prudential system (Owusu-Antwi & Southeastern, 2011).
The advent of formal Non-Bank Financial Institutions (NBFIs) has helped push financial inclusion in Ghana from 66% in 2010 to 75% in 2015 (Zetterli, 2016). The increase is mostly associated with mobile banking technology that is being accessed by more than 16 million Ghanaians and accounted for GHS 35.4 billion in transactions in 2015. The increase is also mostly around access to money transfer services that mobile technology enables. Access to bank products only marginally increased from 34% to 36% over the same period (2010 to 2015).
2. Research Objectives
This paper seeks to begin a conversation that is intended to guide research into greater appreciation of demand-side behavioural factors that may be affecting access to finance by entrepreneurs operating in the MSME sector. While focus is on Ghana, it is expected that the emerging theory will be valuable to other contexts.
This is a theoretical paper that is based on a review of relevant literature and a synthesis of possible conceptual building blocks that could be utilised in subsequentr empirical research and theory development.
The paper draws on three main fields of research: (1) entrepreneurship, (2) behavioural finance and (3) education, to highlight the need for a framework that will enable the kind of interplay between these fields that will provide a basis for influencing behavioural factors affecting access to finance by MSMEs in Ghana and beyond.
3. Statement of the Problem
As shown above, access by MSMEs to formal finance remains low and is fraught with many challenges. Overall access to credit in Ghana only rose from 7% to 9% between 2010 and 2016 (Zetterli, 2016). MSME finance is generally viewed by financial institutions as being of high risk. Although such risk may in part be inherent in the scale and nature of many of these enterprises, anecdotal evidence suggests that financial institutions consider issues of mind set and other socio-cultural factors associated with the enterprise operators as contributors to the resultant high risk profile.
Most studies (such as Prempeh, 2015; Dinh, 2011 and others) have generally focused on supply-side and policy-level issues that have over time informed many of the financial sector reforms that have so far been implemented. There is currently very limited insight into demand-side factors that may be impeding growth in access to MSME credit despite these reforms. Yet, it is clear from the field of entrepreneurship that there are important factors that not only directly affect enterprise success, but which may also be influencing access to enterprise credit. Some of the most critical factors may be associated with the behaviour of the entrepreneur that is seeking to access credit, especially when such behaviour is associated with credit repayment default (Ahmed et.al., 2018; Tenkorang et. al., 2016).
4. Literature Review
4.1 Entrepreneurial Behaviour and Access to Finance
Entrepreneurship has been defined in many ways in literature. But at the core of the concept is the ability to enhance reality (Chileshe, 2018; Mui 2011). This ability will be found in an individual with particular mental and behavioural characteristics. After all, the entrepreneurship process starts with an entrepreneurial mind that conceptually envisions a new reality and then starts to concretely enact it on their environment through commitment of other resources to the process (Johannisson, 1998).
Being entrepreneurial is therefore ultimately about: (1) a state of mind that leads to (2) particular behaviour that combines with (3) environmental circumstances. Because of this recognition, the fields of psychology and sociology are invariably implicated in the pursuit of entrepreneurship development (Frese, 2000; Thornton, 1999).
The field of psychology provides useful theories that assist in understanding the person of the entrepreneur. These theories attempt to answer the question of why entrepreneurs act the way they do. There is growing evidence for the view that the entrepreneurial abilities of an individual are embedded in the characteristics of their personality (Zhao, et al., 2010; Sánchez, 2011). In fact Andersen and Nielsen (2011) demonstrate that challenges with regard to these abilities are more likely to pose a greater constraint to enterprise development than lack of access to finance would.
From a sociological perspective, recent studies have shown that other than the economic circumstances, the local social milieu is critical to fostering entrepreneurship. The immediate environment and relations, including aspects such as family, networks and role models possess significant influence on entrepreneurial activity (Aldrich & Yang, 2014). MSME entrepreneurship may possess a pronounced economic character, but it happens in a social context.
Based on the above, it is reasonable to argue that in as much as psychological and sociological factors affect entrepreneurship development, they will also impact access to enterprise credit. After all, a key determinant of access to such credit is linked to the enterprise potential – which will be embedded in entrepreneurial capabilities evidenced by the way enterprise opportunities have been identified and how arrangements have been put into place for their successful exploitation. Put differently, entrepreneurship is a factor in credit evaluation – it contributes to the overall “collateral” presented to a prospective enterprise financier. It will be expected to reflect in all the 5 Cs of credit (Character, Capacity, Capital, Collateral and Conditions), and probably much more so in the first and most important of these – Character.
Existing literature has very limited empirical insights into the relationship between entrepreneurship behaviour and access to finance. Yet, there are clear indications that some of the biggest challenges to MSME lending in Ghana (especially in sub-sectors such as agriculture) cited by financial service providers relates to the high rates of default and on the impact that this could have on sustainable financial service provision (Ahmed et.al., 2018; Tenkorang et. al., 2016).
Knowledge on behavioural aspects associated with financial decision-making is limited to specific areas of non-bank finance. For instance, Maxwell and Lévesque (2010) examine trustworthiness of the entrepreneur in attracting angel finance. Mitteness et., al. (2010) also initially examine the attribute of passion before later looking at transformational leadership in the same context of angel finance.
Financial education strategies currently being employed in Australia (ASIC, 2018) and Rwanda (NFES, 2013) appear to go furthest in the direction of seeking to influence money management behaviour. The former seem to clearly engage with human behaviour issues but fall short of picking out those that may specifically associated with entrepreneurship development. The Rwandese financial education strategy does provide an important step towards moving beyond the dominant western view of financial education (i.e. engaging with capital markets) to providing a framework for developing basic and appropriate money management behaviour that relates to MSME development. But it too falls should of bringing out specific behavioural issues to be targeted and does not provide a clear theoretical basis to underpin envisaged interventions.
4.2 The Emerging Field of Behavioural Finance
Behavioural finance is a relatively new field of research that falls within the broader component of behavioural economics. Rather than keeping to the well-known, long-held and conventional economic assumptions of rationality and utility (or profit) maximisation, behavioural economics has sought to better understand mental functions and behaviour associated with financial decision-making. It involves the study of psychology as it relates to economic decision-making processes of individuals and institutions. Some of these processes will be in the realm of enterprise development and will involve finance (Shiller, 1981).
As a demonstration that behavioural economics is not an obscure area of research, it has been the main focus of Nobel laureates Herbert Simon (bounded rationality; 1978), Gary Becker (motives, consumer mistakes; 1992), George Akerlof (procrastination; 2001), Daniel Kahneman (illusion of validity, anchoring bias; 2002). More recently, Shafir and Mullainathan (2012) have made their contribution to the psychological view of economics and finance by provided insights into what they refer to as the “Psychology of the poor”. They assert that pre-existing economic circumstances may alter money management behaviour in enterprise development. Others such as Yazdipour (2011) have sought to provide a psychological framework that could help in understanding how entrepreneurs make decisions under risk and uncertainty.
By drawing on Davidsson (1995) and his work in the psychology and sociology of entrepreneurship, we are able to understand that a person’s entrepreneurial behaviour is strongly influenced by the following factors:
1) Background – how an individual has been socialised and what they have been exposed to;
2) Attitude – the mental frame or paradigm that emerges out of an individual’s background;
3) Conviction – The kind of belief system or worldview, influenced by background and attitude;
4) Intention – Specific choices made as a results of convictions held; and
5) Current circumstances – inhibiters and/or enablers that mediate the development of intentions and how these are expressed in the form of behaviour.
This is depicted in the diagram below.
Diagram 1: Socio-Psychological Factors Influencing Entrepreneurial Behavior
Source: Adapted from Davidsson (1995)
This above diagram decomposes entrepreneurial behaviour into elements that could assist in understanding why MSME operators behave the way they do with regard to money management, and could also assist in the design of education interventions intended to influence such behaviour. However, specific research may need to be undertaken to identify what, in the case of Ghana, the specific issues are under each of the areas shown above. Further, a theoretical framework may then need to be developed to help identify the various specific causal relationships that may exist.
Behavioural finance appears to offer some knowledge building blocks that may assist with the theory development process. Some thoughts are presented below.
4.3 Some Relevant Concepts from Behavioural Finance
Various concepts have emerged within behavioural finance to help explain particular observed money-management behaviour that cannot be explained by conventional economic theory. Below are just five that have been selected for illustrative purposes, to provide pointers for further research into what may be most applicable to the Ghanaian context.
1) Altruism and inequity aversion
Altruism is based on indications that individuals will typically behave with such levels of kindness than would be expected from the rational, self-seeking and utility maximising individual described in conventional economics. This concept is also associated with the dislike for unequal outcomes. While this may sound noble and may explain what has for long been observed in many traditional African socio-cultural settings, it could nonetheless potentially inhibit the kind of rational (profit-maximising) and entrepreneurial financial decision-making necessary to sustainable access to finance.
2) Anchoring
This concept is based on the view that, rather than to pursue the most appropriate information for decision-making, individuals possess cognitive biases that lead them towards already available information even if this information may be irrelevant to the decision at hand. It therefore matters what information an individual has been exposed to prior to the decision point.
3) Bounded Rationality
Rationality in decision-making is constrained by realities such as information failure, time limitation, human emotions and human brain capacity to process every piece of information in the most optimal manner. Individuals will therefore seek to satisfice (rather than optimise), will work with heuristics (rules of thumb) and also tend to rely on automated routines. This tells us that the decision-making skills previously developed by an individual will be critical at such times.
4) Choice Architecture
This concept helps us to understand that the environment within which an individual has to make a decision can be so carefully designed as to influence the decision-making process and outcomes thereof. In the case of MSME finance, for instance, such design could address aspects such as the order of items on a credit agreement, the form and nature of follow-up by the credit officer, and the kinds of incentives and/or consequences of loan default.
5) Dual System Theory
The theory arose from research by Nobel Laureate Daniel Kahnemann and is captured in a seminal 2011 publication that has opened up new knowledge realms in behavioural economics. The view is that the mind works off two systems or frameworks. System 1 thinking is fast, sub-conscious (default) and automatic. System 2 thinking is slow, controlled and conscious, only kicking in when important decisions or choices need to be made. Once the decision-making process becomes routine (even if important), it will eventually shift into the realm of System 2 thinking and so be undertaken in a less conscientious manner. Because certain key processes are best undertaken via System 2 thinking, the pursuit of novelty (which may be linked to entrepreneurial creativity and innovation) could help.
The five aspects discussed above are illustrative of an emerging and new direction that recognises socio-psychological aspects in economic decision-making that are also relevant to MSME access to finance.
5. Implications for Entrepreneurship Education – Towards a Theoretical Framework
By its nature education is intended to facilitate shifts in mental function and influence behaviour and society at large. It can therefore play a critical role in entrepreneurship development through its effect on an individual’s ability to perceive entrepreneurial opportunities, and to identify and establish an appropriate enterprise that can successfully exploit these opportunities. By drawing on various concepts from behavioural finance, entrepreneurship education could provide leadership in the development of a suitable process within which the mind-sets and behaviour of MSME operators could be influenced in such a manner that enhances sustainable access to enterprise finance.
The process would require the identifying and use of various “nudges” or mental cues intended to trigger particular behaviour in the target group. These nudges may, for instance, include the use of choice architecture to influence behavioural outcomes. They will also need to recognise and ascertain how best to work with behavioural realities such as altruism, iniquity aversion, anchoring, bounded rationality, dual systems theory and others that have been found to help explain individual behaviour in an economic context.
The specific education process could include, inter alia, the following
1) Systematic training packages that targets specific categories of MSME operators (e.g. urban, rural, agriculture, suppliers, etc);
2) Systematic coaching, mentoring and counselling arrangements
3) Inspirational/Motivational talks around specific issues relevant to the issues, times and target groups;
4) Systematic messaging programme intended to re-enforce particular thinking and behaviour
5) Developing a knowledge repository in different types of media and making this available to the target group.
It does however appear necessary to develop a theoretical framework within which research and intervention efforts could be well-directed. The diagram below depicts what could serve as initial steps towards the development of a theoretical framework within which entrepreneurship education could play a more active role in helping address demand-side issues affecting access to finance by MSMEs in Ghana.
Diagram 2: Towards a Theoretical Framework - Integration of Behavioural Finance into Entrepreneurship Education
Source: Authors
The above diagram exposes the need for collaboration across various disciplines and sectors. While leadership may be provided by the education sector (because this process is essentially about education), expertise from behavioural finance and economics would need to be drawn in. Arrangements for collaboration would also need to be made not only with the financial sector, but also with the MSME sector that stands to also benefit from successful outcomes.
Further, the diagram highlights the need for a very deliberate knowledge generation process that will contribute towards theory development around the interaction of behavioural finance and education in the implementation of entrepreneurship education programmes that enhance MSME access to finance.
Some specific key steps may include the following:
1) The development of in-depth understanding of specific demand-side behavioural issues affecting access to finance;
2) The utilisation of this knowledge in the design of specific education interventions intended to influence identified money management behaviour among MSME operators; and
3) The analysis of outcomes of interventions to ascertain effectiveness of intervention and to help set direction for future research and intervention.
There may be other broader implications arising from the further development the integration of behavioural finance into entrepreneurship education. For instance, there may be need for review of current thinking in entrepreneurship education as it relates to various levels of formal education. Other areas that may be affected include Ghana’s policy and programmes associated with financial education.
6. Conclusion and Recommendations
This paper has sought to begin a conversation around possible ways in which entrepreneurship education could develop greater recognition of specific behavioural factors that may be affecting MSME access to finance. This will require the development of theoretical framework within which these factors and their relationships could be understood (within the Ghanaian context), and through which they could be influenced as part of education process.
Theory development will require that insights are drawn from the fields of entrepreneurship, behavioural finance and education. Some relevant aspects from each of these disciplines have been highlighted and some initial key steps have been suggested.
7. Suggestions for Further Research
It is the intention of this paper to stimulate greater interest in the matters presented, and that further discussion and research will emerge from this initial work. Possible direction of such discussion and research may include the following:
1) Undertaking empirical research that will provide insights into specific behavioural factors affecting MSME access to finance in Ghana;
2) Utilising knowledge available from behavioural finance to build a theoretical framework within which relevant factors can be understood;
3) Testing of this theory to confirm our understanding;
4) Identification and testing of appropriate nudges to be employed (through an education process in influencing financial behaviour among Ghanaian MSME operators;
During and even after the above process, there will obviously be many other questions and issues that will emerge and provide for continued research interest in a direction that is set to continue to capture and sustain research and practice interest.