MGT602 Entrepreneurship GDB 2 Solution Spring 2014

Graded Discussion Board No.2

 Due Date: 04 Aug, 2014

 Marks: 05                                                        

 Topic: Bank lending decisions for Entrepreneurship and SMEs 

 Learning Objectives:

  • To give students a broad view of dynamic lending requirements for Small and Medium Businesses.

Learning Outcomes:                                                  

  • The students will be able to differentiate between qualitative and quantitative measures of lending criterion.
  • Students will also be able to analyze make a critical review of the current lending practices in Pakistan.

 Background:                                                    

A break through idea with a lot of built in value and a sustainable solution to a persisting problem, an entrepreneur must have this package of ignition factors to launch a new business venture. But one of the most difficult problems in the new venture creation process is obtaining the finances.

In Pakistan an entrepreneur usually have three sources to obtain finance: personal funds, family, friends and then commercial financial institutes. In the developed countries like USA, UK, Germany and France, Venture Capitalists (An investor who provides capital to new business ventures and demands a relatively high return on investment) and Business Angels (An investor who provides capital to new business ventures and demands a relatively low return on investment) are also available to help entrepreneurs find capital resources.

The lending criterion is based on the evaluation of risk involved in financing and the ability to pay back the loan. So the lending decision is summarized on the basis of 5 C’s which are Character, Capacity, Capital, Collateral and Conditions. If we carefully observe we come to know that first 2 C’s (Character and Capacity) are qualitative and next 2 Cs (Capital and Collateral) are quantitative in nature.

The practice of capital sourcing from commercial lending institutes is least observed in our region. Complex evaluation criterion (quantitative based) and lesser number of lending institutes are the major reasons for this condition. Entrepreneurial Finance Lab initiated by Center for International Development at Harvard University, USA is working on the qualitative part of the above evaluation matrix. A new evaluation criterion has been developed where risk and payback ability is measured on the basis of Intelligence, ethics, honesty, psychological profile and business ethics of entrepreneurs.
http://www.eflglobal.com/ .

Requirements:

By keeping in mind the 5 C’s evaluation matrix and their qualitative and quantitative divisions you need to give 5 reasons that why Pakistani financial institutes are more focused on the quantitative measures of commercial lending rather than qualitative measures?

Solution:

Quantitative measures is an increase in the size of the balance sheet of the central bank through an increase [in its] monetary liabilities (base money), holding constant the composition of its assets. Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio.

Qualitative measures is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects). The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included

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