The effects of mergers and acquisitions on small business lending - Essay Example

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Small businesses have been cited as essential in the growth and development of world economies, their particular significance in this case is something that is beyond emphasis. In many countries, small businesses make greater contribution to the process of industrialization…
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The effects of mergers and acquisitions on small business lending
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The effects of mergers and acquisitions on small business lending Date:
Small businesses have been cited as essential in the growth and development of world economies, their particular significance in this case is something that is beyond emphasis. In many countries, small businesses make greater contribution to the process of industrialization. Besides raising countries overall output as well as per capita income, small businesses play an active role in employment creation, establishing balances in regional growth and development as well as enhancing effective utilization of resources (Craig & Kohlhase 2006). All these factors are essential in a country’s processes and strategies to improve the GDP and general economic welfare.
Besides the expected advantages arising from consolidations taking place in small businesses, mergers and acquisitions play an important role in increasing the size of banking institutions in a country. These benefits include; mobilizing of domestic savings, which are necessary for investments, deepening and increasing intermediation processes, as well as reduction of inefficiencies entrenched in businesses and other economic activities. However, there is one thing that has remained unclear in many economies, that is; the impact that mergers and acquisition have on credit creation to small and medium-sized businesses in a country.
Effect of Mergers and acquisitions on credit creation
Studies indicate that large and complex organisations that are created by mergers and acquisitions in the banking sector are less disposed compared to small institutions that are less complex. The research further reveals that most of these borrowers in small businesses are dependent on banks for credit; however, they hardly get it following the new business developments in the banking sector.
The reason for this development follows the fact that the large financial institutions resulting from mergers and acquisition in the banking are usually not interested in extending loans and other credit facilities that requite close knowledge of particular small business (Haq 2005). This comes about because there are several diseconomies that arise from the process of such loans, as well as other financial products to not only small business, but also to medium-sized enterprises.
The diseconomies that large financial institutions face in advancing credit to small businesses often arises from several factors, first, lending to these businesses is distinctly different in terms of their activities, which requires the mergers and acquisitions to have different technologies and a special lending culture that takes care of these concerns (Haq 2005). Creation of these systems and structures can be very complicated and time consuming in the face of increased competition in the financial sector.
Bureaucracies in credit creation to small businesses
In addition, the procedures of establishing policies and regulations related to screening processes and monitoring of small business borrowers happen to be quite different compared to those involving large businesses. Mergers and acquisitions fear that their organizational complexity stands to be greatly affected in various ways when they concentrate on advancing credit facilities to small businesses.
Ebimobowei & Sophia (2011), in their research, have indicated that a strong link exists between the size of banking institutions and the amount of credit they supply to small businesses, in this regard, large financial institutions often reserve small proportions of their finacial resources to small businesses compared to that devoted to large businesses.
Following the foregone discussion, it is evident that mergers and acquisition in the banking sector have many undesirable outcomes as far as the growth of small businesses is concerned. Countries stand to share this negative outcome considering the benefits that small businesses have on the general economic growth and development processes.
Craig, S., & Kohlhase, J. (2006). The economic role of small businesses using large data sets an analysis of the contributions of small firms to urban growth. Washington, D.C.: SBA Office of Advocacy.
Ebimobowei, A & Sophia, J. (2011). An Analysis of the Efficiency Effects of Mergers and Acquisitions in the Nigerian Banking Industry. Pakistan Journal of Social Sciences, 2(9), 135-141.
Haq, R. (2005). Alliances and co-evolution insights from the banking sector. Basingstoke England: Palgrave Macmillan. Read More
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