Access to Financial Capital by Black-Owned Businesses in the UK (Dissertation Sample)

Access to Financial Capital by Black-Owned Businesses in the UK
Student’s Name
Institutional Affiliation
Black, White, or Asian: Access to Capital by Black-Owned Businesses in the UK
Introduction
More than half a century after the passing of the Race Relations Act 1968, social and economic disparities between whites and black minority ethnic (BME) groups persist in the U.K. today. A 2020 report by the Social Metrics Commission indicated that nearly half of the Black Caribbean and African households live in poverty compared with one in five white households (Collinson, 2020). The median white household income is £42,371 compared to £25,982 in African-Caribbean households – a 63 percent difference (Collinson, 2020). Black Britons have also lagged behind Whites and Asians in education and employment prospects.
Entrepreneurship has often been regarded as a mechanism for enhancing economic growth, accumulation of wealth and job creation, and alleviating racial disparities for black and other ethnic minority groups (Devlin, 2005). In the U.K., ethnic minority-owned businesses (EMBs) constitute approximately 8 percent of the small business owners. EMBs make significant contributions to the U.K. economy (Clegg, 2011). Every year, they contribute between £25 billion and £32 billion to the economy (Clegg, 2011). They are also vital for the regeneration of declining economic sectors and places, act as catalysts for transnational trade, and promote the integration of new migrants into the U.K. society.
One of the critical elements of new business formation is access to financial capital. The most commonly used form of external finance by businesses is bank funding in the form of loans, overdrafts, and credit cards. In light of the pronounced economic differences between white and black Britons in terms of wealth and income measures, it is important to ask whether black entrepreneurs experience different financing outcomes in capital markets than their white and Asian counterparts. According to Deku et al. (2013), discrimination in credit markets falls into two categories; individual discrimination and redlining. Individual discrimination refers to the refusal by banks to lend to individuals due to certain non-economic features. Redlining relates to the refusal to lend to certain groups of individuals or neighborhoods, also due to non-economic characteristics.
The purpose of this paper is to present an empirical analysis of whether black entrepreneurs face individual discrimination and redlining in their efforts to raise capital to start new businesses. It employs an approach that previous studies have not focused on – the business people themselves. To investigate racial differences in access to capital among white and black-owned businesses, the study will use a case study approach in which a purposive sample of black and white business owners will be selected to give an account of their lived experiences in their previous attempts to obtain bank financing. Given that previous studies on this subject have used secondary data, the present study's approach will provide significant insight into the issues facing black minority groups in accessing financial start-up and operational capital.
Literature Review
The research on financial exclusion and discrimination is in its early stages, with policy in Britain developed only in the last decade. As such, research on the financial inclusion of BME is patchy. The available empirical literature on economic racial discrimination has often cited access to capital as one of the most significant barriers facing EMBs. Khan (2008) states that there are significant quantitative and qualitative data to support the hypothesis that black minority ethnic groups are disadvantaged in accessing financial institutions and services.
According to Khan (2008), there is an inherent bias against black and other minority groups in the banking system tied to the cost of credit calculation. In evaluating a credit application, mainstream lenders consider the income, credit history, age, homeownership, and a range of other factors such as the applicant's residence. With nearly half of black people in the U.K. being from poor backgrounds, they are likely to score worse on all these measures (Kahn, 2008). As such, it becomes difficult for them to obtain consumer and commercial loans from mainstream financial institutions. When they get credit, they are more likely to be charged much higher interest rates and, therefore, more likely to default on their loans (Kahn, 2008). Carter et al. (2013) affirm that discouragement in applying for business loans is highest among Black African (44 percent), Black Caribbean (39 percent), Bangladeshi (31 percent), Pakistani (21 percent), and Indian (9 percent) compared to 4 percent of white businesses.
Carter et al. (2013) have found worse credit outcomes for business owners from certain ethnic groups. Black African businesses are four times as likely to be denied a loan outright than white firm owners. Black Caribbean business are three times as likely, and Bangladeshi firms two times as likely. The possibility of credit denial for Asian firms is slightly lower than white firms (Carter et al., 2013). While 7 percent of white-owned firms obtain business loans, only one percent of black business owners can obtain loans (Carbó et al., 2005). Similarly, only 12 percent of black-owned businesses use credit cards in their first year in operations compared to 32 percent for white-owned businesses (Carbó et al., 2005). The majority of business owners from an ethnic minority background in the U.K. prefer personal loans as a funding source for start-up capital (Fairlie et al., 2020.
According to Carter et al. (2013), racial discrimination of black-owned businesses in the U.K. financial market is a matter of perception. Although variances can be accounted for by other business characteristics, there is no quantitative evidence to suggest that disparities in capital market access among white and black business owners are attributable to skin color Carter et al. (2013). While evaluating loan applications, banks do not enquire about the ethnicity of participants or the ethnic background of the leadership of small and medium-sized enterprises. The outcome of the assessment of the applicant's creditworthiness is based on automated credit score models that do not incorporate ethnicity. This supports the findings of Stunell & Foster (2013), who argue that the disparities in credit outcomes such as loan interest rates and loan denials between white-owned businesses and some ethnic minority firms can be explained by standard risk factors including credit history, availability of financial records, and availability of collateral or assets against which to raise finance. The perception of prejudice and discrimination among ethnic minority businesses creates a lack of confidence in seeking finance, leading to poor uptake of bank finance (Stunell & Foster, 2013).
In his paper titled “Economic opportunity is the next frontier for race equality,” Clegg (2011) notes that challenges to financing for black entrepreneurs remain entrenched in the U.K. banking sector. He argues that banks exclude certain racial minorities from accessing financial services. Although 35 percent of individuals from a black background are willing to start a business, only 6 percent are able to venture into business due to difficulties in obtaining credit (Clegg, 2013). He asserts that black-owned businesses are four times more likely than white-owned businesses to be denied credit outright. Although evidence supporting these claims is anecdotal, it points to significant racial discrimination in the U.K. financial services sector. However, Clegg (2011) notes that the U.K. has made significant progress towards racial equality. Kempson & Whyley (1999) use data compiled by the U.K. Family Resources Survey to assess racial discrimination in the market for consumer credit in the U.K. Their findings indicate that financial exclusion is highest among black, followed by Pakistani and Bangladeshi households, respectively. Their observations confirm the findings of Pollin & Riva (2001), who state that a disproportionate number of black and other ethnic households comprise financially excluded groups.
Deku et al. (2013) investigated the prevalence of racial inequality in the U.K. consumer credit market. They use Logistic and Probit models to examine access to loans and credit cards for 59,477 households. They have found evidence of racial discrimination in the provision of consumer credit services. Compared to white households, ethnic minority households have a higher probability of being excluded from consumer credit even if they possess the same credit characteristics as white households (Deku et al., 2013). People of Black African and Black Caribbean origin are often excluded from the U.K. credit card market, while those of Asian origin have less access to bank loans.
Research Question
The overarching research question of this study is: What are the lived experiences of black business owners in the U.K. in accessing start-up and operational capital from banks?
Proposed Research Methods
Methods of Data Collection
The research will use a multiple case study design to evaluate the experiences of black business owners vis a vis white firm owners. A purposive sample of ten black owners and ten white owners will be selected. According to Ritchtie et al. (2013), purposive sampling is useful for qualitative research as it helps in selecting a demonstrative population. As opposed to random sampling, where the data to be obtaine...